Certified Supply Chain Professional (CSCP) Practice Exam

Why does a product warranty period create a liability for an organization?

1. It costs more to sell warranties

2. Defective goods must be replaced for free

3. It limits product life

4. It encourages product returns

The correct answer is: Defective goods must be replaced for free

A product warranty period creates a liability for an organization primarily because defective goods must be replaced at no additional cost to the customer. When a company offers a warranty, it is essentially making a commitment to the customer that if something goes wrong with the product within the warranty period, the company will take responsibility for fixing or replacing the product. This commitment can result in significant costs for the company, including the direct costs associated with repairs or replacements, as well as potential indirect costs such as customer service handling and reputational management. The warranty acts as a promise that can lead to future financial obligations, transforming a contingent liability into an actual one should warranty claims arise. This means that the company needs to account for these potential costs in their financial statements, thus recognizing the warranty as a liability on their balance sheet. This obligation creates a need for careful management of warranty offerings and related costs, influencing overall financial health and operational strategies.