E-Z Electronics is running a video game promotion. For every 15 video games purchased, the customer receives a coupon upon checkout to receive a free game. The coupons expire in one year. E-Z estimates that about half of its video game customers will qualify to receive a coupon. In the past, the store has recognized a gross profit margin of 20% of the selling price on video games. What would the expected redemption percentage be to calculate the premium expense and related contingent liability? (Remember to use the gross profit margin to arrive at cost.)
A) 4.33% of total video game sales
B) 2.67% of total video game sales
C) 6.67% of total video game sales
D) 15% of total video game sales

Question

Quizplus · Accepted Answer

The expected redemption percentage is calculated by considering the gross profit margin and the number of customers qualifying for the coupon. With a 20% gross profit margin, the cost is 80% of the selling price. Half of the customers qualify, so 50% of 80% is 40%. Since 1 out of 15 games is free, the expected redemption percentage is 40% divided by 15, which is approximately 2.67%.

E-Z Electronics Is Running a Video Game Promotion