Question

Question 21

1. Planet Motors manufactures general and special purpose industrial motors. Planet's management is worried about increasing competition in its industry as a global industrial motor manufacturer has recently shown a keen interest in entering the same customer market as served by Planet. The management is most concerned about the fact that it may lose a significant amount of sales revenue should this competitor make an entry into Planet's market. A description of Planet's top risk, an inherent risk assessment, three risk response alternatives, and a residual risk assessment for each response alternative is provided in the chart given below.​

   ​	Inherent Risk		Risk Response	Residual Risk
   Risk	Likelihood	Impact (on lost revenues)	Alternatives	Likelihood	Impact (on lost revenues)
   A global industrial motor manufacturer has recently shown a keen interest in entering the same customer market served by Planet; it may significantly impact Planet's annual sales revenue.	50%	$76,000,000	A—Sign long-term sales contracts with its three biggest customers before the competitor enters the market	25%	$66,000,000
   			B—Invest in a new quality program with the aim of significantly increasing the performance and quality of its motors so that the new entrant could not match with its quality	40%	$15,000,000
   			C—Take no action in response to this new threat	50%	$76,000,000

   It is estimated by Planet's management that the incremental cost of implementing risk response A is $15,000,000 and the incremental cost of implementing risk response B is $14,000,000.

   ​

   Required:

   A.) Calculate the inherent risk for Planet Motors.

   B.) Calculate the residual risk for Planet Motors associated with each of the three risk response alternatives A, B, and C.

Answer 1