Planet Motors manufactures general and special purpose industrial motors. 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 | 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 |
Risk Response | Residual Risk | |
Alternatives | Likelihood | Impact |
(on lost revenues) | ||
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 possible 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 benefit for Planet Motors associated with each of the three risk response alternatives A, B, and C. | ||
B) Calculate the net benefit for Planet Motors associated with each of the three risk response alternatives A, B, and C. | ||
C) Using net benefit as the criterion, which risk response should Planet Motors choose to implement? |
Planet Motors manufactures general and special purpose industrial motors. A description of Planet's top risk, an...
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