Provisions PP LLC provides warranties at the point of sale to its buyers. In relation...
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PP LLC provides warranties at the point of sale to its buyers. In relation to the warranties, the manufacturer promises to repair or replace defects that become apparent within three years from the date of sale. Drawing on past experience, the manufacturer expects that 65% of goods sold require repair that costs 10% of sale price; 25% of goods sold require repair that costs 35% of sale price; and remaining 10% of goods sold require repair or replacement costing 100% of sale price. Besides, PP LLC anticipates that expenditures for warranties for goods sold in 2017 are going to be incurred 45% in 2018, 35% in 2019, and 20% in 2020 (at the end of year in each period). Discount rate is 7.50% per annum.
In 2017, the Company sold 1,000,000 units of Phone A with cost of 560,000,000 USD at 20% gross profit and 3,000,000 units of Phone B with cost of 500,000,000 USD at 15% markup.
Required:
Determine the amount of warranty obligation that the manufacturer shall recognize for year 2017.
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