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 automobiles 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 dealerships accountant at year-end to arrive at the warranty expense accrual for cars sold each year.

Answer each of the following questions:

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, if sales are down 10%? Justify your percentage.

3. What internal controls might be useful in overseeing Bly's recommendation for warranty expense?