Question

pryor frosted flakes company offers its customers a pottery cereal bowl if they send in 4 boxtops from flakes boxes and $1.00. The company estimates that 60% of the boxtops will be redeemed. In 2007, the company sold 500,000 boxes and costumers redeemed 220,000 boxtops receiving 55,000 bowls. if the bowls cost 2.50 each, how much liabilitiy for outstanding premiums should be recorded at the end od 2007?

Answer 1

Answer: $30,000

Explanation:

Company estimates that 60% of boxtops will be redeemed.

They sold 500,000 boxes

= 500,000 * 60%

= 300,000 boxtops will be sent in.

So far, 220,000 have been sent in. How many left;

= 300,000 - 220,000

= 80,000 boxtops are still to be sent in

4 boxtops are needed to receive a pottery bowl so with 80,000;

= 80,000/4

= 20,000 pottery bowls are due to be issued.

Each bowl costs $2.50 to make.  Customers will send in $1 however so effectively it will cost the company;

= 2.50 - 1

= $1.50

With 20,000 still left to be issued, each costing $1.50, the total liabilitiy for outstanding premiums to be recorded at the end of 2007 is;

= 20,000 * 1.5

= $30,000