Mitchell Corporation Sells 4,000 Units of Inventory During the Year

question 171

Multiple Choice

Mitchell Corporation sells 4,000 units of inventory during the year for $500 each. The selling price includes a one-year warranty on parts. It is estimated that 3% of the units will be defective and that repair costs are estimated to be $50 per unit. In the year of sale, warranty contracts are honored on 80 units for a total cost of $4,000. What amount will be reported as Estimated Warranty Liability at the end of the year?

• A) $4,000.
• B) $2,000.
• C) $6,000.
• D) $0.

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Definitions:

Direct Labor-hours

A measure of the labor time directly involved in the production of goods, used as a base for allocating overhead in some costing systems.

Fixed Overhead

Expenses that remain constant for a certain level of production or period of time, such as rent, salaries, and insurance, not directly tied to the level of production.

Work In Process

Inventory that includes goods partially through the production process but not yet complete.

Fixed Manufacturing Overhead

Indirect manufacturing costs that remain constant regardless of the level of production, such as rent, utilities, and salaries of managers.