Question

ETHICS CHALLENGE O P40 A BTN 11-1 Cameron Bly is a sales manager for an automobile dealership. He earns a bonus each year based on revenue from 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. 1. Does the warranty accrual decision create any ethical dilemma for Bly? 2. Because warranty expenses vary, what percent do you think Bly should choose for the current year? Justify your response.

Answer 1

1. Cameron earns a bonus based on the revenues generated from auto sales less the warranty expenses estimated. A lower estimate of the warranty expenses will earn higher bonus for him since the profits shown will be higher and vice -versa. This gives Cameron the opportunity to fudge the estimates and earn a higher bonus for himself.

2. Bly should ideally choose an estimate that is neither too conservative nor too low which will in turn in the future become questionable. The estimate should be around 5-6% which lies between the plane of 3% to 10% in order to show good profits as well have sufficient reserves to estimate the warranty expenses in the future.