Required information

Skip to question

Elm Manufacturing Company (ELM) is a small manufacturer of back packs located in Rochelle, Illinois. They make three different types of Backpacks:

• A small backpack made for school that is designed to hold books with compartments for school supplies and an outside compartment for a water bottle.This backpack is purchased throughout the year by bookstores, office supply stores, department stores and other specialty stores (e.g. school supply stores) (product number SP001).
• A backpack made for hiking that is designed for individuals that want to spend the day outside.It is more sturdy then the school backpack and has compartments for clothing, food, water, and other hiking supplies.It is largely purchased by camping and sporting goods stores, although it is also carried by department stores that have sporting goods sections and other specialty stores (e.g. bicycle stores) (product number HB005).
• A backpack made for camping. This backpack has a metal frame and includes compartments for various camping equipment including places to tie on a sleeping bag. It is primarily sold in specialty camping stores and sporting goods stores, but some larger department stores may carry these (product number CB008).

Some of the relevant information for these products is included below.

Type	Product Number	Unit Product Cost			Unit Price (wholesale in cases)			Total Units Sold			Total Sales 2020
School Pack	SP00	$	8.06		$	10.00			249,480		$	2,494,800.00
Hiking Pack	HB005	$	18.76		$	23.00			212,940		$	4,897,620.00
Camping Pack	CB008	$	65.16		$	97.00			85,104		$	8,255,088.00
								Total Sales			$	15,647,508.00

All items are only sold by the case (12 per case).

Although the company sells the backpacks to retailers and wholesalers by the case, the individual product is eventually sold to consumers at a variety of retail stores, including specialty sporting goods stores, as well as online retailers.

To increase sales and improve customer satisfaction, ELM provides a full 2-year warranty on all their products. Customers must initiate a warranty claim within two years of retail purchase and must ship the backpack to the companys Rochelle warehouse so that it is received within two weeks of initiating the claim. Customers pay the shipping on the warranty return, ELM pays the cost of shipping the product back, and that cost is included in the cost of the warranty claim.

Upon receipt of a claim, the claim is approved by either warranty manager, Eric Stolman or by production manager Melissa Peck. ELM establishes a sequential warranty claim number (CLAIMNO). If the customer has never returned a product under warranty before, ELM also assigns a sequential customer number specifically related to claims (CLAIMCUSTNO). The CLAIMNO is unique to a single claim, but the CLAIMCUSTNO is used for all claims filed by a single customer.

ELM repairs any backpacks where the total cost of the repair (including labor costs but excluding shipping) is less than the unit cost of a replacement backpack. If the cost of the repair is estimated to exceed the cost of replacing the backpack, a new product is shipped to the customer.

Type	Product Number	Unit Shipping Cost
School Pack	SP00	$	12.50
Hiking Pack	HB005	$	15.50
Camping Pack	CB008	$	21.00

ELM has negotiated shipping rates with UPS and has a fixed packaging and shipping cost for returning products on warranty:

Because ELM prides itself on excellent customer service and product workmanship, the company recognizes warranty expense as 1% of total sales. Historically, this amount has been adequate. The company indicates that all three products have approximately equal warranty claims, but the School and Hiking packs are replaced significantly more than the Camping Pack because of the higher unit cost of a replacement unit. The company redesigned their packs during the 2020 fiscal year (during June, 2019), however the company does not expect warranty claims to change significantly. For the purposes of this case, you may assume that sales occurred uniformly throughout the year.

You have access to the following data: ELM Warranty Data file The following is a data dictionary listing the column names, descriptions and field types in the Warranty Claim 2020 database.

Column Name	Column description	Field type
CLAIMNO	Warranty claim number	Numeric
CLAIMCUSTNO	Customer Number, unique to claims	Numeric
CLAIMDATE	Date the customer warranty claim was reported	Date DD/MM/YYYY
SALEDATE	Date the customer purchased the product from the retail store/online	Date DD/MM/YYYY
RECDATE	Date the returned backpack was received by ELM	Date DD/MM/YYYY
PRODNO	Product Number	Date DD/MM/YYYY
REPLACE	1 if product is replaced, 0 if repaired	Numeric
WARRMAT	Warranty materials cost	Numeric (dollars)
WARRLAB	Warranty labor cost	Numeric (dollars)
FRGHTCOST	Shipping Cost	Numeric (dollars)
RETDATE	Date Product was returned to customer	Date DD/MM/YYYY
WARRAPP	Initials of manager approving warranty repair	Character

You have been assigned to audit ELM Manufacturing Companys Warranty Expense and Liability for the fiscal year end March 31, 2020. ELM has provided you with the following account reconciliation for Accrued Warranty Liability:

Beginning Balance, 4/1/19	$	137,670	*
Warranty Expense, fiscal 2020		156,475
Warranty Costs, fiscal 2020		(170,619	)
Ending Balance, 3/31/2020	$	123,526	**

* Agreed to 3/31/19 audited financial statements

** Agreed to 3/31/20 unaudited General Ledger

Materiality for the warranty expense account is set at $50,000.

ELM has also provided you with their Warranty Claim 2020 database.

Consider the reasonableness of the warranty expense and warranty liability. In reaching your conclusions, consider the following: a. How many warranty claims were filed for each product and what was the total amount of the claims? Consider only warranty claims that incurred costs during the year for Cost, but count all claims filed in count.

b. Does this match your expectations? multiple choice

• Yes, the number of claims are materially the same for all products.

• Yes, there are more claims for the most complex product.

• Yes, the highest total cost is for the most complex product.

• No, the client claimed all products have similar numbers of claims filed.

c. How many customers filed more than one warranty claim during the year? Consider all claims filed, not only completed claims.

d. Which CLAIMCUSTNO filed the most warranty claims during the year? Consider all claims filed, not only completed claims.

e. What were the total number and dollar amount of claims filed by quarter? Summarize the number of claims based on the quarter of the CLAIMDATE and $ amount by quarter of the RETDATE.

Prev

Question 6 linked to 7 and 8 of 8 Total6 7 8 of 8

Visit question mapNext