Determination of Warranty Reserves

Warren W. Menke
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Warren W. Menke: College of Business Administration, University of Florida

Management Science, 1969, vol. 15, issue 10, B542-B549

Abstract: Cost of warranty claims for failure of a product is an identifiable business cost. Methods of calculation are presented for determining this cost item for a linear prorata rebate plan and for a lump sum rebate plan where the customer receives a fixed amount for any failures within the warranty period. It is shown that a calculable amount, usually modest for good products, can be allocated by the manufacturer to a warranty reserve fund to cover the expected risks of warranty claims. Additionally, it is shown that the insight gained by a manufacturer about the components contributing to warranty reserve funding can furnish him with new marketing strategies.

Date: 1969
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