Question

A microwave costs $89, with a $17 full-replacement warranty. If the manufacturer sells 475,360 warranties and has to honor 7.5% of them, how much profit did the manufacturer make from the warranties?
a.
$3,779,112
b.
$7,475,036
c.
$4,908,092
d.
$8,687,204

Answer 1

Revenue = 475,360 × \$17 = \$8,080, + wait compute correctly: expected cost = 0.075 × 475,360 × \$89 = ?

Better to compute per-warranty expected profit:
Per warranty revenue = \$17
Expected replacement cost = 0.075 × \$89 = \$6.675
Per-warranty profit = 17 − 6.675 = \$10.325

Total profit = 475,360 × 10.325 = \$4,908,092

Answer: c. $4,908,092