Exhibit 9-1 The Happy Cereal Company includes a premium in each box of its cereal. For four premiums plus $2.00, customers are entitled to a plastic wiggle worm that costs Happy $4.50 each. Happy expects 60% of the premiums to be redeemed. In 2014, Happy sold 500,000 boxes of cereal and distributed 25,000 wiggle worms.

-Refer to Exhibit 9-1. What is Happy's premium expense for 2014?
A) $125,000
B) $187,500
C) $225,000
D) $337,500

Question

Exhibit 9-1 The Happy Cereal Company includes a premium in each box of its cereal. For four premiums plus $2.00, customers are entitled to a plastic wiggle worm that costs Happy $4.50 each. Happy expects 60% of the premiums to be redeemed. In 2014, Happy sold 500,000 boxes of cereal and distributed 25,000 wiggle worms.

-Refer to Exhibit 9-1. What is Happy's premium expense for 2014?

-Refer to Exhibit 9-1. What is Happy's premium expense for 2014?
A) $125,000
B) $187,500
C) $225,000
D) $337,500

Quizplus · Accepted Answer

Happy expects 60% of 500,000 boxes to be redeemed, which is 300,000 premiums. Since 4 premiums are needed for one wiggle worm, 75,000 wiggle worms are expected to be redeemed. The cost per wiggle worm is $4.50, so the expected premium expense is 75,000 * $4.50 = $337,500. However, customers pay $2.00 for each wiggle worm, so the net cost is $337,500 - (75,000 * $2.00) = $187,500.

Exhibit 9-1 the Happy Cereal Company Includes a Premium in Each