Determination of Warranty Reserves

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.