Your company produces bicycles and is about to start production of a new model.

Question

Your company produces bicycles and is about to start production of a new model. Independent lab tests show that there is a 1% chance, over the course of this bike's life, that the brakes will fail. Your legal team estimates that it will cost your company, on average, $1,000 to settle each incident of brake failure. However, if at least 250 people suffer brake failures, plaintiffs' lawyers will be able to file a class-action lawsuit against your company. Your legal team estimates that a class-action lawsuit will cost your company $100 for every bike you've sold in addition to the estimated $1,000 per incident. Before legal and settlement costs, your company will make an average profit of $65 per bicycle. How many bikes should your company sell so as to maximize its expected profit? Please show your work!

Explanation / Answer

Solution:

production for offsetting litigation

Explanation:

The cost per bike is 1000 and if 250 people file it is 250,000

Plus the suitr cost of 1000,000 comes to 1,250,000

Let x bikes be produced at a profit of 75 each

then 75 x= 1,250,000

x= 17333

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