A Company Sells Sofas with a 6-Month Warranty

question 43

Essay

A company sells sofas with a 6-month warranty. It is estimated that 2% of all units sold will need repairs under warranty at an estimated cost of $200 per unit. In January, the company sold 100,000 sofas at $1,750 each; and 500 sofas needed repairs during that same month. The total repairs amounted to $85,000 costs from the upholstery materials inventory. Prepare the journal entries to record (a) estimated warranty expense for January and (b) warranty repair costs for January.

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Definitions:

Vertical Axis

A line on a graph that represents the range of values for a certain variable, typically found on the left side of a chart.

High-Low Method

A technique used in managerial accounting to estimate variable and fixed costs based on the highest and lowest levels of activity.

Contribution Margin Ratio

A calculation that shows a company's ability to cover its variable costs with its sales revenue, often expressed as a percentage.

Unit Variable Cost

The cost associated with producing additional units which may include materials, labor, and other variable costs.