The fire department has a number of failures with its oxygen masks and is evaluating the possibility of outsourcing preventive maintenance to the manufacturer. Because of the risk associated with a failure, the cost of each failure is estimated at $2,000. The current maintenance policy (with station employees performing maintenance) has yielded the following history:
This manufacturer will guarantee repairs on any and all failures as part of a service contract. The cost of this service is $5,000 per year.
a) What is the expected number of breakdowns per year with station employees performing maintenance?
b) What is the cost of the current maintenance policy?
c) What is the more economical policy?