What is the cost of the guarantee to the manufacturer

Reference no: EM131001982

A certain electrical appliance is sold with a 5-year guarantee. This provides that the full purchase price is refunded if the product fails within 2 years, and half of the purchase price is refunded if the product fails in the following 3 years. A study shows that out of a typical batch of 100 items, there will be 2 failures in the first year, 3 failures in the second year and 4 failures per year after that. Assuming that interest is a constant 5% and that reimbursement is made at the end of the year of failure, what is the cost of this guarantee to the manufacturer, as a percentage of the purchase price?

Reference no: EM131001982

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