C. Should Jensen Tire & Auto purchase the contract? Yes or no. Why? Case Study:

Question

C. Should Jensen Tire & Auto purchase the contract? Yes or no. Why?

Case Study: Maintenance Contract Business decision making is something that management must to do on a daily basis. Jensen Tire & Auto is a family owned auto service company. In recent months, business has been slow so in an effort to reduce cost, the company is deciding on whether to purchase a maintenance contract for its new computer wheel alignment and balancing machine, which costs $5,000 per year, instead of maintaining their own machine. The owner feels that maintenance expense should be related to usage so he collected a random sample of 30 weeks of weekly u (hours) and annual sage maintenance expense (in hundreds of dollars). For each week, the following variables were recorded Weekly usage (hours) Annual Maintenance Expense (S100s) However, he is unsure how to do the analysis. Knowing you are about to finish the course in business analytics, your manager recommended you to the owner and you are now appointed to do the analysis for the above sample information using the appropriate statistical method to determine whether Jensen Tire & Auto should purchase the maintenance contract by answering the following questions a. How many hours the company will have to use the machine per week if they were to buy the contract? b. Comparing the usage from part a, how does this usage compare to the average usage per week? Use the weekly usage average to determine whether Jensen Tire & Auto should purchase the maintenance contract.

Explanation / Answer

a) 5000 $ per year translates to 96.15 $ per week (as there are 52 weeks)

We don't know the hourly rate of expense, If we know it we will divide 96 $ by that hourly rate to find out the no. of hours/ week.

average annual expenses over the 30 samples = 3313 $

average weekly hours over the 30 samples = 21.47

average annual expense/ hr = 154

If we take this as the hourly rate then the weekly hours should be 5000/154 i.e 32.47

b) Annual expenses comes to 3313$ however this might overshoot or go down. If we take 95% confidence intervals around the mean then we get

upper limit of expenses = mean + 19.6* sd/sqrt(n) = 3313+1.96*9/sqrt(30) = 3637

lower limit of expenses = mean - 19.6* sd/sqrt(n) = 3313-1.96*9/sqrt(30) = 2989

so we should take up the contract as the machine costs around 5000 $ which is expensive than the maintenance contract

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