Appliances Unlimited (AU) sells refrigerators. Any refrigerator that fails before it is three years old is replaced for free. Of all refrigerators, 3% fail during their first year of operation; 5% of all one-year-old refrigerators fail during their second year of operation; and 7% of all two-year-old refrigerators fail during their third year of operation.
a. Use simulation to estimate the fraction of all refrigerators that will have to be replaced.
b. It costs $500 to replace a refrigerator, and AU sells 10,000 refrigerators per year. If the warranty period were reduced to two years, how much per year in replacement costs would be saved?