An entity sells goods under warranty and past experience shows that minor defects account for 10% of sales and major defects account for 2% of sales. If minor defects were detected in all goods sold the repair costs would be $260 000, and if major defects were detected in all goods sold the repair costs would be $990 000. The expected value of the warranty costs is:

Question

Quizplus · Accepted Answer

We can use the following system of equations to solve for the expected value of warranty costs:
0.1x + 0.02y = 260000
0.02x + 0.02y = 990000
where x represents total sales of goods.
Solving for x and y, we get:
x = 8000000
y = 1700000
Now, we can calculate the expected value of warranty costs as follows:
0.1(8000000) + 0.02(1700000) = $ 858,000
Therefore, the best choice is C, $ 45,800.

An Entity Sells Goods Under Warranty and Past Experience Shows