Help with this questions as it relates to the attached image story Suppose that the number of HDTV sets sold in 2007 is projected to be 4% more than the number sold in 2006. How much profit can...
Help with this questions as it relates to the attached image story
Suppose that the number of HDTV sets sold in 2007 is projected to be 4% more than the number sold in 2006. How much profit can ElectronicCity expect per-store in 2007 from its warranty extension business? (Assume that the average selling price of an HDTV set in 2007 remains the same as in 2006.)
Certain data is missing, such as number of stores, probability of a customer buying a warranty, etc. Suitable assumption will be made to cover these aspects.
Total sales value in 2006 = $710.7 million
Expected sale value in 2007 = 4% more than 2006
= 104% of 710.7 million = $ 739.128 million
Assuming that 55% of transactions result in warrant sales (data taken from another enotes question on same dataset: http://www.enotes.com/homework-help/from-image-attached-you-could-you-please-help-481100)
Thus, sales resulting in warranty sale = 55% of $739.128 million = $406.5204 million
Warranty value@8% of sale price = 8% of 406.5204 = $32.522 million
Thus the company sells a total of $32.522 million worth of warranty sales in 2007. since total number of stores are not given, we will assume all this sale coming from a single store.
Cost of warranty:
Expected TV sales in 2007= 4% more than 2006 = 104% of 3,20,000 = 3,32,800
Failure@4% = 4% of 3,32,800 = 13,312 TV will report failure
Minor failure@95% cases = 95% of 13312 = 12646 cases
cost of minor repair = $100/hr * 1.5 hr = $150
cost of minor repairs = 12646 * 150 = $1.8969 million
Major failure@5% cases = 5% of 13312 = 666 major failure
cost of major failure = $800/case
total cost of major failure = 666*800 = $0.53248 million
total cost of warranty extension = $1.8969 + 0.53248 million = $2.42938 million
Total profit = Sale-cost = $32.522-2.42938 = $ 30.09262 million ~ $30.1 million
Hope this helps.