MacKenzie Refrigeration is a manufacturer of residential

refrigerators and freezers MacKenzie #2486

MacKenzie Refrigeration is a manufacturer of residential refrigerators and freezers.MacKenzie
manufactures refrigerators for various retailers and sells its products underthe retailers own
brand name. Each refrigerator it sells comes with a 2-year warranty.Recently, MacKenzie
discovered a defective damper control assembly—an automaticvalve that periodically' opens to
let cold air into the refrigerator compartment from thefreezer compartment—that is used on its
most popular refrigerators. Because of thisdefect, the valve has a tendency' to remain in the
open position and allow' too much coldair into the refrigerator compartment. Therefore, any food
in the refrigerator that contains liquid (e.g., milk, orange juice, meats, fruits) will freeze.
MacKcnzie’s Chief Operations Officer (COO) wishes to issue a product recall to repair the
defective assemblyw hich will cost the company approximately $1,000,000 to $1,200,000, or
about 5% ofits net income. Howevcr, the Chief Financial Officer (CFO) believes that such an
expense is not necessary'. Based on an internal investigation, MacKenzie estimated that
approximately one fourth of all its refrigerators will experience a damper control failure prior to
the expiration of the 2-year warranty'. The CFO has determined that it will be more cost effective
to repair, under the existing warranty program, only those units that fail within the first 2 years.
In fact, he argues that the company’s refrigeration repair division might actually make money as
it charges the customer for repairing the defective assemblies outside of the warranty' period.
As most of MacKenzie’s products arc sold under other company’s brand names, the CFO
argues that there will be minimal impact on the company’s image. The Chief Executive Officer
(CEO) must present this issue toMacKenzie’s board of directors and wants to know' the proper
accounting treatment ofthese product recall costs. Directions1. Research the related generally'
accepted accounting principles and prepare a shortmemo to the Chief Executive Officer that
explains how MacKenzie should reportthe product recall costs. Cite your reference and
applicable paragraph numbers.View Solution:
MacKenzie Refrigeration is a manufacturer of residential refrigerators and freezers MacKenzie

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