The formulas used to calculate warranties are meant to cover manufacturing errors. Every once in a while, a defective unit will get past quality control in the factory due to human error. The warranty is designed to protect customers if they get one of these units.

The "Red Ring of Death" is likely from a design flaw, not a manufacturing error. A manufacturing error would not account for the abnormal failure rate. It is literally built into every unit that leaves the factory. The only long-term solution to a design flaw is a product recall.

Extending the warranty is just a temporary solution because Xbox 360s will continue get the "Red Ring of Death".