Answer to Question #169951 in Statistics and Probability for Ellah abad

Question

A company estimates that about 0.7% of their products will fail after the regular one-year warranty but within two years from the date of purchase. If this happens, the company will pay a replacement cost of 3500. If the company offers its customers an extended warranty covering a period of two years for the price of 480.

Answer 1

Given information

• Replacement cost: 350
• Offer extended warranty: 48

The company expected value of each warranty sold is calculated as follow.

EV=480−(3500∗0.007)=455.5

Therefore, required expected value is 455.5