A franchised service station is considering the offering of air conditioner (A/C

Question

A franchised service station is considering the offering of air conditioner (A/C) repair services. They estimate that 0.2 of their customers will purchase this A/C service, which will generate an average profit of $106 per customer. The main threat to this new service is the possibility of changing environmental regulations that affect A/C service repairs only. These new regulations will cost $27 per customer. The franchise estimates the probabilit that the new environmental regulation will go into effect is 0.31. Calculate the expected value of the new A/C service. Round your answer to one decimal place. ANSWER = 19.5 - but how?

Explanation / Answer

Profit per customer = $106

Probability that customers will prchase AC service = 0.2

Total Profit = 106* 0.2 = 21.2

Probability that new environmental regulation will go into effect = 0.31

New regulation cost per customer = $27

Total cost = 0.2* 0.31*27 = 1.674

the expected value of the new A/C service = 21.2 - 1.674 = 19.526 which is 19.5 when round off to one decimal place.

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