ExpertMedium2 marksShort Answer
ACCA · Question 12 · Recording transactions and events
Section A
Titan Electronics sells appliances with a one-year warranty. Based on past experience, 5% of appliances will have major defects costing $100 to repair, 15% will have minor defects costing $30 to repair, and 80% will have no defects. During the year, Titan sold 10,000 appliances.
What is the expected value of the warranty provision required at the year-end? (Enter numbers only)
Section A
Titan Electronics sells appliances with a one-year warranty. Based on past experience, 5% of appliances will have major defects costing $100 to repair, 15% will have minor defects costing $30 to repair, and 80% will have no defects. During the year, Titan sold 10,000 appliances.
What is the expected value of the warranty provision required at the year-end? (Enter numbers only)
How to approach this question
Calculate the expected cost per unit by multiplying the probability of each defect type by its repair cost. Then multiply the total expected cost per unit by the number of units sold.
Full Answer
Expected cost per unit = (5% * $100) + (15% * $30) + (80% * $0) = $5.00 + $4.50 = $9.50. Total provision required = 10,000 units * $9.50 = $95,000.
Common mistakes
Calculating the provision based only on the major defects or miscalculating the percentages.
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