I must be overthinking this question…can someone potentially rephrase the explanation to the question below?
Lew Co. sold 200,000 corrugated boxes for $2 each. Lew's cost was $1 per unit. The sales agreement gave the customer the right to return up to 60% of the boxes within the first six months, provided an appropriate reason was given. It was immediately determined, with appropriate reason, that 5% of the boxes would be returned. Lew absorbed an additional $10,000 to process the returns and expects to resell the boxes. What amount should Lew report as operating profit from this transaction?
A. $170,000
B. $179,500
C. $180,000
D. $200,000
Operating profits will take into account the estimated returns and operating costs.
Sales (200,000 x $2) $ 400,000
Cost (200,000 x $1) (200,000)
Tentative Gross Profit 200,000
Est Returns (5% x 200,000) (10,000)
Added costs (10,000)
Operating profit $ 180,000
I selected A, 170,000, doing the same calculation as above, except 20,000 for returns. My thought was that 5% of the 200,000 boxes are getting returns, or 10,000 boxes, but at a price of $2 each for a total of $20,000. However, upon reading the explanation, are we then to infer that the $10,000 in estimated returns is for the cost of the boxes, and the $10,000 in the added costs represents the gross profit Lew would have had per box–and lost out on due to the returns?
.