Question

Edwards Co. includes one coupon in each bag of dog food it sells. In return for 4 coupons, customers receive a dog toy that the company purchases for £1.20 each. Edwards's experience indicates that 60 percent of the coupons will be redeemed. During 2018, 100,000 bags of dog food were sold, 12,000 toys were purchased, and 50,000 coupons were redeemed. During 2019, 120,000 bags of dog food were sold, 16,000 toys were purchased, and 60,000 coupons were redeemed.

1. If cash with an amount of less than £1.2 is received from customer for each dog toy given, explain how this would affect the premium expense in 2018? (No need to show any calculation)

2. If cash with an amount of less than £1.2 is received from customer for each dog toy given, explain how this would affect the premium liability at the end of 2018? (No need to show any calculation)

3. The clerical staff argued that if the sales volume of dog food in 2018 is recorded wrongly, it would not have any effect on the accurateness of the premium liability at the end of 2019, because premium liability at the end of 2019 is related to sales volume of dog food in 2019, but not related to the sales volume of dog food in 2018. Do you agree with him? Explain the reasons. (No need to show any calculation)

Answer 1

Ans. :-

Coupons and premiums are the marketing tools used to increase the sales of the products. These offers generally increases the promotional expense of the organization.

1.  If cash with an amount of less than £1.2 is received from customer for each dog toy:-

• If any cash is received from the customers for each dog toy given to them, then it will result in decrease of the Premium expense by an amount received from the customers in respect of such dog toys given to them.

2.

• Any amount received from the customers in respect of dog toys would also affect the premium liability at the end of the year 2018; The amount to be provided for the Premium liability would also decrease.

3. Yes, the contention of the clerical staff is correct.

• Amount of the premium liability is calculated using following formula :
• Hence, it is evident from the above that, if sales data of 2018 is reported wrongly, then it does not affect the premium liability of the 2019.