A company estimates that 0.1% of their products will fail after the original warranty period but within 2 years of the purchase, with a replacement cost of $150. If they offer a 2 year extended warranty for $12, what is the company's expected value of each warranty sold

Question

Mathematics

Alanna Melendez

1 March, 11:06

A company estimates that 0.1% of their products will fail after the original warranty period but within 2 years of the purchase, with a replacement cost of $150. If they offer a 2 year extended warranty for $12, what is the company's expected value of each warranty sold

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Answers (1)

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Lacey Raymond · Answer 1

The expected value of each warranty sold is $11.85

Step-by-step explanation:

Warranty sold for $12.

The product fails during the warranty period with 0.001 = 0.1% probability. In this case, the company has to replace the product with a cost of $150, having a net loss of 150 - 12 = $138

1-0.1% = 99.9% = 0.999 probability that it does not has to reimburse the client, so it gains $12.

What is the company's expected value of each warranty sold

0.999*12 - 0.001*138 = 11.85

The expected value of each warranty sold is $11.85