Relevant costs; sales mix; writing Microsoft announced it was extending the warranty on its video game player (introduced two years earlier) to three years for a certain type of malfunction indicated by three ashing red lights on the game console. The warranty extension would apply to previously sold units; however, the warranty for any other type of failure would not be extended beyond the original one-year warranty term. In making this announcement, Microsoft indicated it would take a charge of $1.051.15 billion for the costs of the warranty extension.

A- In Chapter 3 you learned about two different formats of the income statement. One of these formats is required by GAAP and the other is more helpful to managers for internal decision making. For this problem, which income statement format should you use and why?

B- What information regarding fixed costs do you need to know in this scenario?