Hopewell sells a line of goods under a six-month warranty. Any defect arising during that period is repaired free of charge. Hopewell has calculated that if all the goods sold in the last six months of the year required repairs the cost would be $2 million. If all of these goods had more serious faults and had to be replaced the cost would be $6 million. The normal pattern is that 80% of goods sold will be fault-free, 15% will require repairs and 5% will have to be replaced. What is the amount of the provision required?
Hopewell sells a line of goods under a six-month warranty. Any defect arising during that period is repaired free of charge. Hopewell has calculated that if all the goods sold in the last six months of the year required repairs the cost would be $2 million. If all of these goods had more serious faults and had to be replaced the cost would be $6 million. The normal pattern is that 80% of goods sold will be fault-free, 15% will require repairs and 5% will have to be replaced. What is the amount of the provision required?
Chapter16: Working Capital Policy And Short-term Financing
Section: Chapter Questions
Problem 33P
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Hopewell sells a line of goods under a six-month warranty. Any defect arising during that period is repaired
free of charge. Hopewell has calculated that if all the goods sold in the last six months of the year required
repairs the cost would be $2 million. If all of these goods had more serious faults and had to be replaced the
cost would be $6 million.
The normal pattern is that 80% of goods sold will be fault-free, 15% will require repairs and 5% will have to
be replaced.
What is the amount of the provision required?
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