Reference no: EM131668796

Whirlswim Appliance is considering giving each of its customers free maintenance on each DVD player purchased. The company estimates that this proposal will require it to pay an average of $2.50 for each DVD player sold today (the cost in today’s dollars). Currently, the market consists of 72,000 consumers whose last purchase was from Whirlswim and 86,000 consumers whose last purchase was from a competitor. In a given year, 40 percent of all consumers purchase a DVD player. If their last purchase was a Whirlswim, there is a 60 percent chance that their next purchase will be a Whirlswim. If their last purchase was not a Whirlswim, there is a 30 percent chance that their next purchase will be a Whirlswim. A purchase during the current year will lead to a $20 profit. The contribution to profit (and maintenance cost per purchaser) from a purchaser grows at 5 percent per year. Profits (over a 30-year horizon) are discounted at 10 percent per year.

Suppose that you provide free maintenance. If the customer’s last purchase was a Whirlswim, the probability that the customer’s next purchase will be a Whirlswim will increase by an unknown amount between 0 percent and 10 percent. Similarly, if you give free maintenance and the customer’s last purchase was not a Whirlswim, the probability that her next purchase is a Whirlswim will increase by an unknown amount between 0 percent and 10 percent. Do you recommend that Whirlswim adopt the free maintenance policy?