Future costs of service contracts for consumer durable goods

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Abstract
A service contract is an agreement between the manufacturer of a durable good and its buyer by which the manufacturer undertakes to repair and maintain the product over a certain stated period of time for a fee payment by the customer. The manufacturer offering such a service contract is faced with several design and planning decisions much as with any other product. Models of product and part failures and of future costs of repair and replacement are basic to the formulation of these decision problems. A mixed exponential distribution is suggested as a possible time-to-failure model for part failure. It is mathematically tractable and has a decreasing failure rate which is a desirable property. Simple renewal theoretic models of sequences of failures and their costs are developed and applied to the mixture model. Expressions are obtained for the expectation and variance of future costs.

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