Question

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.

Question 1: Does the warranty accrual decision create any ethical dilemma for Bly?

Question 2: Since warranty expenses vary, what percent do you think Bly should choose for the current year? Justify your response.

Answer 1

ANSWER

Following is the required data from the given case: CB is a sales manager and his bonus is based on revenue for the year less warranty expenses. • As per last 10 years' experience, actual warranty expenses higher percentage is 10 and low is 3. • However, CB wants to continue higher percentage as warranty for the year.

1) Identify the ethical dilemma in given case: Here CB wants to continue higher percentage as warranty for the year. It is incorrect since some years it will be 3% only. Higher warranty expenses reduces the current year income, hence CB should not estimate warranty expense as 10%.

Identify the correct warranty expense: Low warranty expense = 3% High warranty expense = 10% Here company cannot consider higher percentage and lower percentage for current year warranty liability. Therefore, better to consider average percentage as warranty liability for the year. 3% +10% Average percentage= = 6.5%

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