Question:
The fire department has a number of failures with its oxygen masks and is evaluating the possibility of outsourcing the 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:
Number of breakdowns Number of years in which breakdowns occurred
0 4
1 3
2 1
3 5
4 5
5 0
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 which includes all costs related to the failure.
a) What is the expected annual cost of the current maintenance policy with station employees performing maintenance?
b) Which is the more economical policy? Assume that if the maintenance is outsourced, the workers currently performing this work will keep their jobs.