See how sensitive the results in Example 11.2 are to the following changes. For each part, make the change indicated, run the simulation, and comment on any differences between your outputs and the outputs in the example.
a. The cost of a new camera is increased to $300.
b. The warranty period is decreased to one year.
c. The terms of the warranty are changed. If the camera fails within one year, the customer gets a new camera for free. However, if the camera fails between 1 year and 1.5 years, the customer pays a pro rata share of the new camera, increasing linearly from 0 to full price. For example, if it fails at 1.2 years, which is 40% of the way from 1 to 1.5, the customer pays 40% of the full price.
d. The customer pays $50 up front for an extended warranty. This extends the warranty to three years. This extended warranty is just like the original, so that if the camera fails within three years, the customer gets a new camera for free.
EXAMPLE 11.2 WARRANTY COSTS FOR A CAMERA
The Yakkon Company sells a popular camera for $400. This camera carries a warranty such that if the camera fails within 1.5 years, the company gives the customer a new camera for free. If the camera fails after 1.5 years, the warranty is no longer in effect. Every replacement camera carries exactly the same warranty as the original camera, and the cost to the company of supplying a new camera is always $225. Use simulation to estimate, for a given sale, the number of replacements under warranty and the NPV of profit from the sale, using a discount rate of 8%.
Objective To use simulation to estimate the number of replacements under warranty and the total NPV of profit from a given sale.
WHERE DO THE NUMBERS COME FROM? The warranty information is a policy decision made by the company. The hardest input to estimate is the probability distribution of the lifetime of the product. We discuss this next.