Circuit City Stores, Inc. Circuit Term Paper

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Effectively, most customers drop the warrantee in the drawer, and forget about it, and a net profit is earned by the company. This is one reason that so many consumer advisory groups suggest that customers do not buy such warrantees. The certainty of the revenue is another point in Chalifoux's favor. According to the Journal of Accountancy, "The profit margin on the extended warranty contract is unusually high in comparison to the profit margin on the product. Estimated costs to be incurred on the extended warranty contract are nominal in relation to the combined price and can be estimated with a high degree of reliability." Additionally, these accounts cannot usually be canceled, further adding to the certitude of profit.

2. What should Mike Chalifoux do?

Mike should present a statement to the FASB demonstrating the following

1. Extended warrantee services are a reliably included 'item' with the purchase of a stereo, thus viewing the transaction as a unit is entirely appropriate.

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There are no sales of service contracts that are not connected to the product.

2. The requests for service are reliably minimal, thus resulting in a minimal unexpected drain upon company finances.

3. Consumers must pay a small fee that makes up for any unexpected costs incurred by Circuit City in fulfilling the service contract.

4. The profit margin on the contracts is both reliable and high.

5. Chalifoux could also submit evidence that there are few complaints or recalls regarding the products, and thus relatively few expectations that costly replacements will be required......

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"Circuit City Stores Inc Circuit" (2010, April 24) Retrieved June 5, 2026, from
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