Mike Scott is the sales manager for a tractor supply company. He earns an annual bonus based on sales minus related warranty expenses. Actual warranty expenses have varied over the past 15 years from a low of 2% of sales to a high of 10%. In the past, Scott has recommended an estimate on the high side of the range in order to be conservative.

1. Does the warranty accrual recommendation create an ethical dilemma for Scott? If so, explain why.

2. What percent would you recommend if you were Scott, why?