Recently had a similar problem on my S500. It indicated ok, but it leaked oil. The sender unit is located on the right of the engine just above the pan.

For my car, had to jack up the engine so you can remove all of the screws (15 or so) on the pan. First, of course, you must drain your the oil. So this job is most naturally done when you need an oil change.

After that, it basically installation of a new sender unit. In my case, the two 'O' rings the seal it were leaking, so they were replaced. This is a fairly expensive job (in my case) just to change two 0.05 cent O-rings.

Make sure that it's just not a bad connection that's causing the erratic indication. You may be able to do that yourself if you can get under the car.

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Regards . . . . JimF
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'94 S500 Cpe

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