Pharoah Company sells remote control airplane engines, which carry a one-year warranty. If a customer brings in a defective engine, he replaces the engine with a new one from his inventory. Pharoah estimates that 2% of sales are defective. As of January 1, the Warranty Liability had a credit balance of $400.

Pharoah provided the following sales and warranty cost information for his year end of December 31.

Sales price per engine		$115
Total sales		940	units
Actual warranty costs		$1,175