Moto Win Auto Superstore is thinking about offering a two-year limited warranty for $978 on all new cars of a certain model. The terms of the warranty would be that Moto Win would replace the car free of charge under certain, specified conditions. Replacing the car in this way would cost MotoWin $16,300. Suppose that under the warranty, there is a 6% chance that Moto Win would have to replace the car one time and a 94% chance they wouldn't have to replace the car. If MotoWin knows that it will sell many of these warranties, should it expect to make or lose money from offering them? How much?

Question

Business

Sammy Berg

27 December, 12:17

Moto Win Auto Superstore is thinking about offering a two-year limited warranty for $978 on all new cars of a certain model. The terms of the warranty would be that Moto Win would replace the car free of charge under certain, specified conditions. Replacing the car in this way would cost MotoWin $16,300. Suppose that under the warranty, there is a 6% chance that Moto Win would have to replace the car one time and a 94% chance they wouldn't have to replace the car. If MotoWin knows that it will sell many of these warranties, should it expect to make or lose money from offering them? How much?

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Answers (1)

Know the Answer?

Lucy · Answer 1

they would expect to lose 58.68 dollars on each warranty visit.

Explanation:

We can use the following method to solve the given problem in the question;

Solution

Expected value for Motowin = $978*0.94 - $16300*0.06 = - $ 58.68

Hence, In the long run, they would expect to lose 58.68 dollars on each warranty visit.