Mike Thatcher is a sales manager for an automobile dealership in Alberta. Mike earns a bonus each year based on revenue generated by the number of vehicles sold in the year less related warranty expenses. The quality of automobiles sold each year seems to vary since the warranty experience related to vehicles sold is highly variable. The actual warranty expenses have varied over the past 10 years from a low of 3% of an automobile’s selling price to a high of 10%. In the past, Mike has tended toward estimating warranty expenses on the high end just to be prudent. It is the end of the year and once again he must work with the dealership’s accountant in arriving at the warranty expense accrual for the cars sold this year.
1. Does the warranty accrual decision present any kind of ethical dilemma for Mike Thatcher?
2. Since the warranty experience is not constant, what percent do you think Mike should choose for this year? Justify your response.