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 form a low of 3% 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 answer.

Answer 1

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

Answer:

Since he's only human, the warranty accrual decision may probably create ethical dilemma for Billy. If he followed past practice and continued to estimate warranty expenses on the high end, he'll get a smaller bonus than if he were to estimate them on the low end. So what he has to do here, is to put aside personal interests and make a justifiable warranty provision.

2. Because warranty expenses vary, what percent do you think Bly should choose for the current year? Justify your answer.

Answer:

He should look at the trend of the actual warranty expenses. If they had been rising steadily from 3% to 10%, then he should indeed use the higher end for the provision, and vice versa, if they were trending down.

If there is not a relevant or recognisable trend there, he should take that average of past 3 or 4 years as it is the case of automobile dealership.

  He could also look at other companies in the same industry and see what percentage they use , in addition to looking at his own company.