Optimal Use of Product Warranties

Under a warranty service contract, the manufacturer of a product agrees to repair and maintain the product over a certain stated period of time for a fee payment by the customer. When the warranty period is over, the user is responsible for any future repairs. The problems facing the user in this situation are the determination of the economic life of the product and the selection of the best warranty policy, given several optional warranties. This paper develops a simple stochastic model of product failures and the associated repair costs to obtain the economic life (of a warranted product) that minimizes the average total cost rate. The result is useful in evaluating warranty alternatives.