International Research Journal of Applied and Basic Sciences © 2015 Available online at www.irjabs.com ISSN 2251-838X / Vol, 9 (8): 1378-1388 Science Explorer Publications Offering a model for determination of optimal warranty period and production price Ezzatollah Asgharizadeh 1 , Mehdi Ajalli 2 , Hossein Jannatifar 3 1. Associate professor of Dept. of Industrial Management, University of Tehran, Tehran, Iran, asghari@ut.ac.ir 2. Ph.D. Candidate of Industrial Management, University of Tehran, Tehran, Iran, 3. Ph.D. Student of Industrial Management, University of Tehran, Tehran, Iran Corresponding Author email: mehdiajalli2010@gmail.com ABSTRACT: Nowadays warranty is an important element in marketing, especially for the products that enter the market for the first time. Usually customers do not have enough information about productions efficiency, in such conditions; warranty plays a significant role in persuading customers to buy the products. As customer’s point of view, warranty is a sign of quality and reliability and when customers have different choices among the similar products, warranty will be an effective factor in decision making. Also warranty, as a means of marketing, has positive effects on manufacturer’s sales and profit but in the other hand, it imposes some costs to the manufacturers. As failures occur randomly, calculation of warranty costs is complicated but estimation of these costs is essential cause of their effects on profit. This paper tries to offer a model for determination of optimal warranty period and production price in regards to effects of warranty on sales amount. For achieving this purpose a model that is included of three warranties polices, which was offered by Murthy, is used and it is optimized by Glickman and Berger equation and at the end an application of the model is explained. Keywords: Warranty, Warranty Policy, Free Repair/Replacement warranty (RFRW), Pro Rata Warranty (RRW) INTRODUCTION Warranty is a contract between seller and purchaser, in which seller guarantees satisfactory function of product regarding what is defined as product function up to a specified date (Blischke and Morty 1992). Product warranty has a significant role in strategies of production and marketing in order to obtain market share and to control expenses depending on quality. Today, producers use warranty as a tool to gain competitive advantage as studies conducted show that purchasers consider mode of offering warranty as an indicator of quality and reliability of product and this is effective as to extent of purchase by purchasers and on extent of sale for producers. Although offering warranty has a positive effect on sale of producers, as it creates a liability for them, brings expenses to them as well. As such expenses are related to the extent of fault in product and such faults are accidental, therefore, these expenses are variable and accidental as well. Producers have various warranty policies to offer warranty. Among such policies is free replacement warranty, free repair warranty or pro rata warranty. What affects way of offering warranty on the part of producers is extent of failures of products and related expenses. Thus, producers are to determine life distribution function of product, its reliability and therefore, failure rate of product by collecting information related to failures. This way they can estimate expected expenses for each policy of offering warranty and therefore, determine length of offering warranty and sales price which is economically justified. Literature review Warranty Policies Warranty policies are comprised of three compensatory measures, number of criteria regarded for determining length of warranty coverage and mode of counting length of warranty (Blischke etal 1975). Classification of such factors causing formation of various policies of warranty is as follows: Compensatory Measures When a product encounters failure during warranty, seller has a few compensatory options such as repair, replacement or paying compensation for the failure. According to these measures, warranty policies are classified as free repair/ replacement warranty (FRW), pro rata warranty (PRW) and combination warranty (combination of two previous policies).