Cameron Bly is a sales manager for an automobile dealership. He earns a bonus ea

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.

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.

Explanation / Answer

Solution:-

1. Does the warranty accrual decision create any ethical dilemma for Bly:-

It does create an ethical dilemma because Bly is estimating a number that has a direct effect on his bonus. The bonus should really be adjusted in subsequent years so that it is based on actual warranty expense and not accrued warranty expense. That would remove any incentive Bly would have to fudge the numbers.

2. Because warranty expenses vary, what percent do you think Bly should choose for the current year:-

I think Bly should use an average from the past five years. I think going back 10 years is too long a period because cars change from year to year, and more recent data would be more relevant.

Please Rate or comment if you have any doubt regarding this solution.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.