Two-Wheel Products Company sells bicycles for $120, with a 60-day warranty against defects. Past experience indicates that 6% of the bicycles will have a defect and that the necessary repairs will cost $16 per bicycle. Sales for May were $108,000; 20 units sold in May were found defective and repaired that month.
What is the estimated liability for product warranties on May 31?
A) $544
B) $320
C) $864
D) None of the above

Question

Quizplus · Accepted Answer

The estimated liability is calculated by taking 6% of the total units sold in May, multiplying by the repair cost per unit, and subtracting the cost of repairs already made. Total units sold = $108,000 / $120 = 900 units. Estimated defects = 900 * 6% = 54 units. Estimated repair cost = 54 * $16 = $864. Repairs already made = 20 * $16 = $320. Estimated liability = $864 - $320 = $544.

Two-Wheel Products Company Sells Bicycles for $120, with a 60-Day