Caldor Health, a supplier of in-home health care products, introduced a new therapeutic chair carrying a one-year warranty against defects. Customers are also offered the opportunity to buy a two-year extended warranty for an additional charge. During December of 2021, its first month of availability, Caldor sold 3,200 of chairs, 40% of which were purchased with the extended warranty. The unit selling price of a chair is $500, and the unit selling price of an extended warranty is $100. Industry experience indicates the following probability distribution for the potential warranty costs:

In 2022, warranty costs are

• $128,000 with probability 10%
• $80,000 with probability 40%
• $115,200 with probability 50%

An arrangement with a service firm requires that costs for the neo-year warranty period be settled at the end of 2022. The risk-free rate of interest is 7%. Applying the expected cash flow approach for warranty expenses, at the end of the 2021 fiscal year, Caldor would record a profit (revenues minus expenses) of:

 

$1,497,600

$1,504,299

$1,510,914

$1,476,560