CAF-6 · Chapter 1 · Question 4 of 15
Sigma Corp provides a warranty for its products. Based on past experience, there is a 60% chance of zero repair costs, a 30% chance of minor repairs costing Rs. 1,000,000 in total, and a 10% chance of major repairs costing Rs. 2,000,000 in total. What amount should be recognized as a warranty provision?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Rs. 500,000
Explanation
The provision is calculated using the expected value method: (0 x 60%) + (1,000,000 x 30%) + (2,000,000 x 10%) = 0 + 300,000 + 200,000 = Rs. 500,000.
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