Question 1200353: A company estimates that 0.3% of their products will fail after the original warranty period but within 2 years of the purchase, with a replacement cost of $350.
If they offer a 2 year extended warranty for $29, what is the company's expected value of each warranty sold?
$
Answer by ikleyn(52851)   (Show Source):
You can put this solution on YOUR website! .
A company estimates that 0.3% of their products will fail after the original warranty period
but within 2 years of the purchase, with a replacement cost of $350.
If they offer a 2 year extended warranty for $29, what is the company's expected value of each warranty sold?
Solution
Notice that 0.3% = 0.003.
The expected profit of selling each warranty is
29 - 0.003*350 dollars = 29 - 1.05 dollars = 27.95 dollars. ANSWER
Here $29 is what a customer pays for the 2-years warranty,
and 0.003*350 = 1.05 dollars is the company's average expense per unit to cover the replacement.
The net 29 - 1.05 = 27.95 dollars is the expected company's profit of each warranty sold.
$27.95 is the price which an average customer does agree to pay to the company for peace in mind.
Solved and explained.
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