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Warranty Expenses

Cannon Bly is a sales manager for an automobile dealership. He earns a bonus each year based on revenue for the number of autos sold in the year less related warranty expenses. Actual warranty expenses have varied over the prior 10 years from a low of 3% of an automobile's selling price to a high of 10%. In the past, Bly has tended to estimate warranty expenses on the high end to be conservative. He must work with the dealership's accountant at year-end to arrive at the warranty expense accrual for cars sold each year.

a. Does the warranty accrual decision create any ethical dilemma for Bly?

b. Since warranty expenses vary, what percent do you think Bly should choose for the current year? Justify your response.

Solution Summary

Cannon Bly is a sales manager for an automobile dealership. He earns a bonus each year based on revenue for the number of autos sold in the year less related warranty expenses. Actual warranty expenses have varied over the prior 10 years from a low of 3% of an automobile's selling price to a high of 10%. In the past, Bly has tended to estimate warranty expenses on the high end to be conservative. He must work with the dealership's accountant at year-end to arrive at the warranty expense accrual for cars sold each year.

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