Cann°" Bly 1S a sales manager for an automobile dealership. He earns a bonus each yeai based on revenue from the number of autos sold in the year less related warranty expenses. Actual warranty exP®nsos have vaned 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. Since warranty expenses vary, what percent do you think Bly should choose for the current year1? Justify your response.