What Situation Represents a Contingent Liability for a Company

question 6

Multiple Choice

What situation represents a contingent liability for a company?

• A) A candy company's monthly production requires 1000 kg of chocolate. The company entered into a contract with a chocolate producer to purchase 6000 kg of chocolate over the next six months at the market price.
• B) A bike company learned that a racer using its bike was seriously injured in an accident on December 30th, 2015, as the front wheel of the bike was released as the result of a manufacturing defect. The company had not received a claim at December 31st, 2015, but management expects to receive a claim.
• C) A restaurant received a $10 000 claim from a customer for emotional damages as a result of poor service. The legal counsel of the restaurant indicated that the claim was not supported and there was less than a 5% chance that the restaurant would have to pay.
• D) A hotel chain was found guilty by a judge for not refunding customers who had online reservations. The hotel chain will have to pay $50 000 to various customers in the following year.

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Definitions:

Holding Cost

The expenses incurred for storing and maintaining inventory, including warehousing, insurance, and depreciation costs.

Monthly Demand

The total quantity of a product or service that consumers are willing and able to purchase within a calendar month.

Price Discrimination

A pricing strategy where a seller charges different prices for the same product or service to different customers, based on market conditions, customer characteristics, or the nature of the purchase.

Discounts

Reductions on the regular price of goods or services, usually offered to encourage purchases.