Video Recreation Inc. (VRI) is a supplier of video games and video equipment such as large-screen televisions and video cassette recorders. The company recently concluded a major contract with Sunview Hotels to supply games for the hotel video lounges. Under this contract, a total of 4,000 games will be delivered to Sunview Hotels throughout the United States, and all games will have a warranty period of 1 year for both parts and labor. The number of service calls required to repair these games during the first year after installation is estimated as follows:

VRI's Customer Service Department has developed the following three alternatives for providing the warranty service to Sunview:
(a) Under plan 1, VRI would contract with local firms to perform the repair services. It is estimated that six such vendors would be needed to cover the appropriate areas and that each of these vendors would charge an annual fee of $15,000 to have personnel available and to stock the appropriate parts. In addition to the annual fee, VRI would be billed $250 for each service call and would be billed for parts used at cost plus a 10% surcharge.
(b) Under plan 2, VRI would allow the management of each hotel to arrange for repair service when needed and then would reimburse the hotel for the expenses incurred. It is estimated that 60% of the service calls would be for hotels located in urban areas, where the charge for a service call would average $450. At the remaining hotels, the charge would be $350. In addition to these service charges, parts would be billed at cost.
(c) Under plan 3, VRI would hire its own personnel to perform repair services and to do preventive maintenance. Nine employees, located in the appropriate geographical areas, would be required to fulfill these responsibilities, and their average annual salary would be $24,000. The fringe benefit expense for these employees would amount to 35% of their wages. Each employee would be scheduled to make an average of 200 preventive maintenance calls during the year, and each of these calls would require an average of $15 worth of parts. Because of this preventive maintenance, it is estimated that the expected number of hotel calls for repair service would decline 30% and the cost of parts required for each repair service call would be reduced by 20%.
VRI's Accounting Department has reviewed the historical data on repair costs for equipment installations similar to those proposed for Sunview Hotels and found that the cost of parts required for each repair occurred with the following frequency:

Required:
Which of the proposed plans should VRI adopt to minimize its warranty obligations to Sunview Hotels? Provide calculations that support your recommendation.

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Number of Service Calls Probability of Occurrence 400 700 900 1,200 .3 .4 .2 Parts Cost per Repair $30 40 60 90 Frequency 15% 15 45 25