Answer to Question #174007 in Statistics and Probability for dwight

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

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

$$EV=480-(3500\cdot0.007)=455.50$$

Therefore, required expected value is 455.50.