A fast food restaurant just leased a new freezer and food fryer for three years.

Question

A fast food restaurant just leased a new freezer and food fryer for three years. The service contract for the freezer offers unlimited repairs for a fee of $125 a year plus a $35 service charge for each repair needed. The restaurant’s research indicates that during a given year 80% of these freezers need no repairs, 11% needed to be serviced once, 5% twice, 4% three times, and none required more than three repairs. The mean restaurant’s annual expense with the service contract for this freezer is

Explanation / Answer

Repair charges =125+25x where x is no of repairs

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For finding annual cost let us find E(x) and then multiply by 35

E(x) = 0.80(0) + 0.11(1) + 0.05(2) +0.04(3)

= 0.33

Hence expected annual expenses = 125+0.33(35)

= 136.55

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