Question

A company estimates that 7% of their products will fail after the original warranty period but within 2 years of the purchase, with a replacement cost of $250.

If they want to offer a 2 year extended warranty, what price should they charge so that they'll break even (in other words, so the expected value will be 0)

Answer 1

A company estimate is 7%

A replacement cost of $250.

$Charge = 250 \times \frac{7}{100} \\ = 250 \times 0.07 \\ = \$17.5$