Question 1

HeavyMachinery Co sells industrial equipment with a one-year warranty. Based on past experience, 5% of equipment sold will have major defects costing $1,000 each to repair, and 15% will have minor defects costing $200 each to repair. During the year, 1,000 units were sold. What is the expected value of the warranty provision required at year-end?

Accepted Answer

Use the expected value method. Calculate the cost of major defects and add it to the cost of minor defects based on the probabilities.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Only calculating the provision for the most likely outcome, rather than the expected value of all outcomes.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FA — Financial Accounting Practice Exam 3

More questions from this exam