This is simply a task that I have to solve for my exam, so bear with me. And I can't really specify more than the question reads as it's just a theoretical situation.
Suppose there is a manufacturer of specific machines. All sales made include a two-year warranty under which cost of repairs are covered for all manufacturing defects.
This is what I've got (based on past data):
60 percent of the machines sold need no repairs during their first year; minor defects are detected in the first year for 25 percent of the machines, resulting in repair costs about £1000 per machine; 15 percent suffer from major defects in year one, causing repair expenses about £30000 per sale.
And the question itself involves finding the amount recognized as a provision. I understand, in the case of the initial year, this simply comes down to calculating the cost based on the percentages given and the products sold (no particular amount is specified in the task, just to be clear). However, it is the amount of possible costs that could occur in the second year of the warranty that I can't seem to figure out. I have simply been advised to find the appropriate mathematical approach to apply in accounting.
Well, my maths always has been bad, so that would explain my inability to find a solution.
Any ideas? Help would be greatly appreciated!
Suppose there is a manufacturer of specific machines. All sales made include a two-year warranty under which cost of repairs are covered for all manufacturing defects.
This is what I've got (based on past data):
60 percent of the machines sold need no repairs during their first year; minor defects are detected in the first year for 25 percent of the machines, resulting in repair costs about £1000 per machine; 15 percent suffer from major defects in year one, causing repair expenses about £30000 per sale.
And the question itself involves finding the amount recognized as a provision. I understand, in the case of the initial year, this simply comes down to calculating the cost based on the percentages given and the products sold (no particular amount is specified in the task, just to be clear). However, it is the amount of possible costs that could occur in the second year of the warranty that I can't seem to figure out. I have simply been advised to find the appropriate mathematical approach to apply in accounting.
Well, my maths always has been bad, so that would explain my inability to find a solution.
Any ideas? Help would be greatly appreciated!