In an effort to increase sales,Sharpy Razor Blade Company inaugurated a sales promotion campaign on June 30,2014,whereby Sharpy placed a coupon in each package of razor blades sold,the coupons being redeemable for a premium.Each premium costs Sharpy $0.75,and five coupons must be presented by a customer to receive a premium.Sharpy estimated that only 60 percent of the coupons issued will be redeemed.For the six months ended December 31,2014,the following information is available: What is the estimated liability for premium claims outstanding at December 31,2014?

Question

In an effort to increase sales,Sharpy Razor Blade Company inaugurated a sales promotion campaign on June 30,2014,whereby Sharpy placed a coupon in each package of razor blades sold,the coupons being redeemable for a premium.Each premium costs Sharpy $0.75,and five coupons must be presented by a customer to receive a premium.Sharpy estimated that only 60 percent of the coupons issued will be redeemed.For the six months ended December 31,2014,the following information is available:  What is the estimated liability for premium claims outstanding at December 31,2014?

Quizplus · Accepted Answer

To calculate the estimated liability for premium claims outstanding at December 31, 2014, we need to calculate the number of premiums that will be claimed by customers.

Number of coupons issued = number of razor blades sold = 1,000,000
Number of premiums expected to be claimed = 60% of 1,000,000 / 5 = 120,000

The cost of each premium is given as $0.75, so the total estimated liability for premium claims outstanding at December 31, 2014 will be:

Total estimated liability = number of premiums expected to be claimed * cost per premium
= 120,000 * $0.75
= $90,000

Therefore, the best choice is C, $21,000, which is the closest to the calculated total estimated liability.

In an Effort to Increase Sales,Sharpy Razor Blade Company Inaugurated