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 Failures	Number of years in which Failures Occurred
0	4
1	3
2	1
3	5
4	5
5	0

In reading this chart, there are 4 years in which there were no failures, 3 years in which there was one failure, etc.

The manufacturer who is offering the preventive maintenance contract will guarantee repairs on any and all failures as part of a service contract. The cost of this service contract is $5,000 per year which includes all costs related to the failure. The manufacturer will also provide spare units. Hence, the fire department incurs no cost by selecting to outsource to the manufacturer other than the cost of the service contract.     

a) What is the expected annual cost of the current maintenance policy with station employees performing maintenance?

b) Which is the more economical practice to use? Assume that if the maintenance is outsourced, the workers currently performing this work will keep their jobs.  

Answer 1

Number of Failures	Cost of failure C	Number of years in which Failures Occurred (N)	C*N
0	0	4	0
1	2000	3	6000
2	4000	1	4000
3	6000	5	30000
4	8000	5	40000
5	10000	0	0
	Total	18	80000
a)	Expected annual cost of current maintenance policy =   80000/18		4444.44
b)	Cost of service contract is 5000
	So total cost for 18 years would be 90000
	While if maintenance is done inhouse, cost is 80000
	So economical option would be to do the maintenance in house