Warranties Clearview Company manufactures and sells high-quality television sets

Question

Warranties

Clearview Company manufactures and sells high-quality television sets. The most popular line sells for $1,300 each and is accompanied by a three-year warranty to repair, free of charge, any defective unit. Average costs to repair each defective unit will be $95 for replacement parts and $60 for labor. Clearview estimates that warranty costs of $36,270 will be incurred during 2014. The company actually sold 1,300 television sets and incurred replacement part costs of $10,200 and labor costs of $15,600 during the year. The adjusted 2014 ending balance in the Estimated Liability for Warranties account is $29,400.

Required:

1. How many defective units from this year's sales does Clearview Company estimate will be returned for repair?

2. What percentage of sales does Clearview Company estimate will be returned for repair?

Explanation / Answer

Defective cost: material+ labour=95+60=155

Estimated warranty cost=36270

Estimated defectives= 36270/155= 234

Actual sales= 1300

Cost: Replacement=10200/95=107

Labor= 15600/60= 260

all defectives doesnot necessarily require replacement.But all replacements are essentailly backed by labor work

so number of defectives need to be ascertained from labor and not from replacements

Actual defectives were around 260 where as estimated was around 234

Estimated liabilty for warranty at end of year 2014 was 29400

Total cost= 10200+15600= 25800

% of replacement cost= 10200/25800 *100 = 39.5%

% of labor costs= 100-39.5= 60.5%

So out of estimated warranty cost of 29,400

Replacement cost= 29400*39.5%= 11613

labor cost=29400* 60.5%= 17787

1. so number of defective units estimated = 17787/60 = 296.45=297

2. Percentage of sales returned for repair= 297/1300*100= 22.85%

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