Y D Audio Ethics Case And Warranty Case
Warranty Policies: Estimate within GAAP and Ethical Decision Making
By Michael Fetters & Peter Wilson, Babson College
Warranty policies can be classified into two major categories; those that come with the product at no apparent additional cost (e.g. standard 3 year/36,000 miles warranty that often accompanies the purchase of an automobile) and those purchased by a customer at an additional cost (e.g. purchasing an extended warranty for a newly purchased automobile to extend the repair coverage beyond the standard 3 year/36,000 mile policy). In this section we will discuss the first major category: warranties offered with the product for no additional cost. We will first look at the accounting for such a policy within a start-up company and then extend our discussion to warranties issued by Apple when they sell hardware. Finally we will ask you to recommend an estimation procedure and expense amount for the start-up company and to support your recommendation with both business and ethical reasons.
The Entrepreneurs
Ying Tsi and Daphne Cohen, as electrical engineers in a master’s program, co-developed a new wireless audio speaker system and upon graduation partnered with a business undergraduate from a well-known Boston area business school west of the city, to create a start-up company (Y&D Audio) to produce and sell this new system. Ying and Daphne decided to target their system to audiophiles and price the speaker system at $5,000 expecting each unit would cost $2,000 to produce. After speaking with numerous industry people they also decided they needed to offer a product warranty to encourage sales. Typical warranty periods were one year but because Y&D is a new venture, Ying and Daphne decided on a two year warranty period if the additional cost is not too much. An examination of industry data uncovered that the average cost of warranties for the first year after sale was typically 10%-15% of the cost of the system. Adding a second year to the
By Michael Fetters & Peter Wilson, Babson College
Warranty policies can be classified into two major categories; those that come with the product at no apparent additional cost (e.g. standard 3 year/36,000 miles warranty that often accompanies the purchase of an automobile) and those purchased by a customer at an additional cost (e.g. purchasing an extended warranty for a newly purchased automobile to extend the repair coverage beyond the standard 3 year/36,000 mile policy). In this section we will discuss the first major category: warranties offered with the product for no additional cost. We will first look at the accounting for such a policy within a start-up company and then extend our discussion to warranties issued by Apple when they sell hardware. Finally we will ask you to recommend an estimation procedure and expense amount for the start-up company and to support your recommendation with both business and ethical reasons.
The Entrepreneurs
Ying Tsi and Daphne Cohen, as electrical engineers in a master’s program, co-developed a new wireless audio speaker system and upon graduation partnered with a business undergraduate from a well-known Boston area business school west of the city, to create a start-up company (Y&D Audio) to produce and sell this new system. Ying and Daphne decided to target their system to audiophiles and price the speaker system at $5,000 expecting each unit would cost $2,000 to produce. After speaking with numerous industry people they also decided they needed to offer a product warranty to encourage sales. Typical warranty periods were one year but because Y&D is a new venture, Ying and Daphne decided on a two year warranty period if the additional cost is not too much. An examination of industry data uncovered that the average cost of warranties for the first year after sale was typically 10%-15% of the cost of the system. Adding a second year to the