A company estimates that 0.7% of their products will fail after the original warranty period but within 2 years of the purchase,

Question

4 years ago

11

with a replacement cost of $300.
If they offer a 2 year extended warranty for $47, what is the company's expected value of each warranty sold?

1 answer:

8_murik_8 [283] · Answer 1 · 2022-01-20T21:17:47+03:00

Answer:

$44.90

Step-by-step explanation:

The resulting value for the company of replacing a failed product is given by the price of the warranty minus the cost of replacement:

$F= \$47-\$300 =-\$253$

This event has a 0.7% chance of happening.

The resulting value for selling extended warranty to a product that does not fail is given by the proce of the warranty:

$W= \$47$

This event has a 99.3% chance of happening.

The expected value is:

$EV = \$47*0.993+(\$47-\$300)*0.007\\EV=\$44.90$

The expected value for each warranty sold is $44.90.