Florentino Allers is the production manager of Electronics Manufacturer. Due to limited capacity, the company can only produce one of two possible products: • An industrial motherboard with a 75% probability of making a profit of $1 million and a 25% probability of making a profit of $190,000. A regular motherboard with a 100% chance of making a profit of $710,000. Florentino will get a 20% bonus from his department. Florentino has the responsibility to choose between the two products and is more of a risk-taker, more so than most of the top management at Electronics Manufacturer. A. Which option is Florentino more likely to choose and why? Florentino will choose the industrial motherboard since he is a risk-taker, and a 75% chance of a $1 million profit is much higher than (even though there is a 25% chance of a $190,000 profit with the industrial motherboard). ✓ the $ B. Which option would the company be more likely to choose and why? The company, being a lower risk ✓taker than Florentino, would prefer the regular motherboard because of the certainty of earning $ While the expected value of the industrial motherboard is $ higher ✔, the potential difference of $ is not enough offset the higher risk ✔ (25% chance) of only earning $190,000. C. What changes should the company make to Florentino's compensation to avoid unnecessary risks? The company should reduce ✔ to ✔the size of the bonus and increase ✓the salary, thus leveling the playing field when it comes to risk-taking.
Florentino Allers is the production manager of Electronics Manufacturer. Due to limited capacity, the company can only produce one of two possible products: • An industrial motherboard with a 75% probability of making a profit of $1 million and a 25% probability of making a profit of $190,000. A regular motherboard with a 100% chance of making a profit of $710,000. Florentino will get a 20% bonus from his department. Florentino has the responsibility to choose between the two products and is more of a risk-taker, more so than most of the top management at Electronics Manufacturer. A. Which option is Florentino more likely to choose and why? Florentino will choose the industrial motherboard since he is a risk-taker, and a 75% chance of a $1 million profit is much higher than (even though there is a 25% chance of a $190,000 profit with the industrial motherboard). ✓ the $ B. Which option would the company be more likely to choose and why? The company, being a lower risk ✓taker than Florentino, would prefer the regular motherboard because of the certainty of earning $ While the expected value of the industrial motherboard is $ higher ✔, the potential difference of $ is not enough offset the higher risk ✔ (25% chance) of only earning $190,000. C. What changes should the company make to Florentino's compensation to avoid unnecessary risks? The company should reduce ✔ to ✔the size of the bonus and increase ✓the salary, thus leveling the playing field when it comes to risk-taking.
Chapter12: Balanced Scorecard And Other Performance Measures
Section: Chapter Questions
Problem 2PA: Florentino Allers is the production manager of Electronics Manufacturer. Due to limited capacity,...
Related questions
Question
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College