Business College

A company estimates that 0.7% 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

Answers

Answer 1

Answer:

$10.97

Explanation:

Calculation for what is the company's expected value of each warranty sold

First step is to calculate the outcome

Outcome=$150-$12

Outcome=138

Second step is to calculate the outcome probability

Outcome probability=1-0.007

Outcome probability=0.993 and 0.007 respectively

Now let calculate the company's expected value of each warranty sold

Expected value of each warranty sold=$12*0.993+(-$138)*0.007

Expected value of each warranty sold=$10.97

Therefore Expected value of each warranty sold is $10.97

Related Questions

CCC Company’s most recent income statement shows (in thousands of dollars) sales $2,000, interest payments $100, and net income $140. Its most recent balance sheet shows (also in thousands of dollars) total debt financing $800. If the total asset turnover ratio computed from the company’s most recent financial statements was 1.5, what would we compute return on assets (ROA) to be? (Hint: you should use the DuPont method of analysis.) A. 4.7% B. 10.5% C. 26.7% D. 18.7% E. 3.0%

Answers

Answer:

B. 10.5%

Explanation:

The computation of the return on assets is shown below:

As we know that

Return on assets = Net income ÷ total assets

where,

Total assets is

Total asset turnover = Sales ÷ Total assets

1.5 = $2,000 ÷ Total assets

So, the total assets is $1,333.33

Now the return on assets is

= $140 ÷ $1,333.33

= 10.5%

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