Illustration - "expected value" method An entity sells goods with a warranty under which customers are covered for the cost of repairs of any manufacturing defects that become apparent within 6 months after purchase. If minor defects are detected in all products sold, repair costs would be about P1,000,000.
Illustration - "expected value" method An entity sells goods with a warranty under which customers are covered for the cost of repairs of any manufacturing defects that become apparent within 6 months after purchase. If minor defects are detected in all products sold, repair costs would be about P1,000,000.
Chapter1: Financial Statements And Business Decisions
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Explain the problem. Explain the answer step by step with words.
![Illustration - "expected value" method
An entity sells goods with a warranty under which customers
are covered for the cost of repairs of any manufacturing
defects that become apparent within 6 months after
purchase.
If minor defects are detected in all products sold, repair costs
would be about P1,000,000.
If major defects are detected in all products sold, repair costs
of P5,000,000 would result.
The entity's past experience and future expectations indicate
that 75% of the goods sold will have no defects, 20% will have
minor defects and 5% will have major defects.
The expected value or cost of repairs is measured as follows:
75% sales
20% sales (20% x 1,000,000)
5% sales (5% x 5,000,000)
None
200,000
250,000
Total expected value or cost of repairs
450,000](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F69b30ad6-7663-4290-846d-de111a90c5ce%2Fd6f15c8f-2ee7-4ec5-abbe-a9f5a5716972%2Fauz926_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Illustration - "expected value" method
An entity sells goods with a warranty under which customers
are covered for the cost of repairs of any manufacturing
defects that become apparent within 6 months after
purchase.
If minor defects are detected in all products sold, repair costs
would be about P1,000,000.
If major defects are detected in all products sold, repair costs
of P5,000,000 would result.
The entity's past experience and future expectations indicate
that 75% of the goods sold will have no defects, 20% will have
minor defects and 5% will have major defects.
The expected value or cost of repairs is measured as follows:
75% sales
20% sales (20% x 1,000,000)
5% sales (5% x 5,000,000)
None
200,000
250,000
Total expected value or cost of repairs
450,000
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