Question

The probability that equipment used in a hospital lab will need recalibration is given in the following table. A service firm is willing to provide maintenance and provide any necessary calibrations for a fee of $625 per month. Recalibration costs $550 per time. Which approach would be most cost-effective, recalibration as needed or the service contract? (Round the answer of "Expected cost of recalibration" to nearest whole number. Omit the "$" sign in your response.)

Number of recalibrations	0	1	2	3	4
Probability of occurrence	.10	.20	.25	.20	.25

Expected cost of recalibration	$ __________

Pick one of the three below:

• Service contract

• Recalibration

• Either approach costs the same

_____

Answer 1

expected number of recalibration =xP(x)=0*0.1+1*0.2+2*0.25+3*0.2+4*0.25=2.3

therefore expected cost of recalibration =550*2.3 =1265

since cost of Recalibration is higher than Service contract

therefore Service contract wold be most cost effective,