Question

Select the correct answer.
The cost of a piece of machinery is $1,750 if supplied by company A and $1,680 if supplied by company B. Company A's contract offers unlimited repairs for $25 per month. Company B's contract charges $150 per repair.

The table lists the probabilities of the number of repairs required by company B's machinery during one year.

Number of Repairs

0

1

2

3

Probability

0.25

0.41

0.22

0.12


Based on the data provided, which statement about the total cost for one year is true?

A.
The offers from both companies are equally cost effective.

B.
The offer from company A, with the repair contract, is more cost effective than company B's offer.

C.
The offer from company B, with the repair contract, is more cost effective than company A's offer.

D.
The offer from company A, without the repair contract, is more cost effective than company B's offer.

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Answer 1

Compute one-year totals.

Company A: 1750 + 25*12 = 1750 + 300 = $2050.

Company B: expected repairs = 0(0.25)+1(0.41)+2(0.22)+3(0.12) = 1.21 repairs.
Expected repair cost = 1.21*150 = $181.50.
Total expected cost = 1680 + 181.50 = $1861.50.

Since $1861.50 < $2050, company B's offer is more cost effective. Answer: C.