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Start production of a new model

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Your company produces bicycles and is about to start production of a new model.

Independent lab tests show that there is a 1% chance, over the course of this bike's life, that the brakes will fail.

Your legal team estimates that it will cost your company, on average, $1,000 to settle each complaint of brake failure. However, if at least 250 people suffer brake failures, plaintiffs' lawyers will be able to file a class-action lawsuit against your company. Your legal team estimates that a class-action lawsuit will cost your company $1 million in addition to the estimated $1,000 per incident settlement. Before legal and settlement costs, your company will make an average profit of $75 per bicycle. How many bikes should your company sell so as to maximize its expected profit (after expected legal and settlement costs)?

Reference no: EM131513126

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