In November 2005, Microsoft introduced its highly anticipated new video game player, the Xbox 360.

In early July 2007, Microsoft announced it was extending the warranty on its Xbox 360 to three years for a certain type of malfunction indicated by three flashing red lights on the game console. The warranty extension would apply to previously sold units; however, the warranty for any other type of failure would not be extended beyond the original one-year warranty term. In making this announcement, Microsoft indicated it would take a charge of $1.05-1.15 billion in the quarter ending June 30, 2007, for the costs of the warranty extension.

a. What relevant costs were likely considered by Microsoft management in reaching the decision to extend the warranty on the Xbox 360 and, in so doing, incur in excess of $1 billion of additional costs?

b. Conduct research to determine how Microsoft's stock price was affected by the announcement of the warranty extension and its associated costs on July 6, 2007.

Explain why the stock price reacted as it did.

c. Assume that one of the rationalizations for Microsoft to extend the warranty on the Xbox 360 was to manage sales mix. How could the extension of the Xbox warranty affect the sales mix of Microsoft's entertainment and devices division?

d. Comment on whether Microsoft was ethically obligated to extend the warranty on the Xbox 360 to three years.