A department supervisor is considering purchasing one of two comparable photocop

Question

A department supervisor is considering purchasing one of two comparable photocopy machines, A or B. Machine A costs $10,000 and machine B costs $10,500. This department replaces photocopy machines every three years. The repair contract for machine A costs $50 per month and covers an unlimited number of repairs. The repair contact for machine B costs $200 per repair. Based on past performance, the distribution of the number of repairs needed over any one-year period for machine B is shown below, You are asked to give a recommendation based on overall cost as to which machine. A or B. along with its repair contact, should be purchased. What would your recommendation be? Give a statistical justification to support your recommendation.

Explanation / Answer

A costs 600/year contract over 3 years = 1800
we will ignore the time value of money (interest rate becausemoney is not paid up front for contract...)

1 .25 cost 200 =50 2 .15 cost 400 = 60 3 .10 cost 600 Per one years the expected cost of repair = 50+60+60=170, overthree years = 3 x 170=510
SO: B costs 500 more, save 1800 in contracts, and pay onaverage 510 in repair, SOUNDS BETTER to buy B

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