Warranty4U provides extended service contracts on electronic equipment sold thro

Question

Warranty4U provides extended service contracts on electronic equipment sold through major retailers. The standard contract is for three years. During the current year, Warranty4U provided 42,000 such warranty contracts at an average price of $81 each. Related to these contracts, the company spent $400,000 servicing the contracts during the current year and expects to spend $2,100,000 more in the future. What is the net profit that the company will recognize in the current year related to these contracts?

Explanation / Answer

Price of the warranties = 21,000 x 81 = $ 1,701,000 Warranty Expenses in the Current year = $200,000 Net Profit on Warranties = 1,701,000- 200,000 = $1,501,000

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