ABC computers sells computers with a two year warranty Based

ABC computers sells computers with a two year warranty. Based on past experience ABC computers expects the following payouts for warranty work associated with the computers they sold in 2013: a 20% chance that they will payout 3800, a 50% chance that they will pay out 6300 and a 30 percent chance that the payout will be 7500. For computers sold in 2014 they expect a 30% chance that they will payout 5400, a 50% chance that they will pay out 7200 and a 20 percent chance that the payout will be 8400. Applying what you know about decision making under uncertainty what will the cost of warranty claims to the company be for 2013? 2014? Total?

Solution

The cost of warranty claims to the company be for 2013 = Expected cost of payout in 2013

= 20%*3800 + 50%*6300 * 30%*7500 = 6160

The cost of warranty claims to the company be for 2014 = Expected cost of payout in 2014

= 30%*5400 + 50%*7200 * 20%*8400 = 6900

Total cost = 6160 + 6900 = 13060