Use the following information for questions 127, 128, and 129.
Muggs Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers receive a leash. The leashes cost Muggs $3 each. Muggs estimates that 45 percent of the coupons will be redeemed. Data for 2014 and 2015 are as follows:
-The premium expense for 2014 is
A) $187,500.
B) $45,000.
C) $75,000.
D) $84,375.

Question

Use the following information for questions 127, 128, and 129.
Muggs Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers receive a leash. The leashes cost Muggs $3 each. Muggs estimates that 45 percent of the coupons will be redeemed. Data for 2014 and 2015 are as follows: 
-The premium expense for 2014 is
A) $187,500. 
B) $45,000. 
C) $75,000. 
D) $84,375.

Quizplus · Accepted Answer

The number of bags sold in 2014 was 500,000. Each bag contained one coupon, so the total number of coupons distributed was 500,000. Since Muggs estimates that 45 percent of the coupons will be redeemed, the number of coupons expected to be redeemed is 225,000 (500,000 x 0.45). Since it takes eight coupons to obtain a leash, the number of leashes expected to be given away is 28,125 (225,000 / 8). The cost of the leashes is $3 each, so the total premium expense for 2014 is $84,375 (28,125 x $3).

Use the Following Information for Questions 127, 128, and 129