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 80% probability of making a profit of $1 million and a 20% probability of making a profit of $200,000.A regular motherboard with a 100% chance of making a profit of $680,000.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?B. Which option would the company be more likely to choose and why?C. What changes should the company make to Florentino’s compensation to avoid unnecessary risks? 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 80% probability of making a profit of $1 million and a 20% probability of making a profit of $200,00o.• A regular motherboard with a 100% chance of making a profit of $680,000.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 topmanagement 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 80% chance of a $1 million profit is muchthe $(even though there is a 20%chance of a $200,000 profit with the industrial motherboard).B. Which option would the company be more likely to choose and why?The company, being ataker than Florentino, would prefer the regular motherboard because of the certainty of earning $While the expected value of theindustrial motherboard is $the potential difference of $isto offset the(20% chance) of only earning$200,000.C. What changes should the company make to Florentino's compensation to avoid unnecessary risks?The company shouldthe size of the bonus andthe salary, thus leveling the playing field when it comes to risk-taking.

Ans to Q A. : Florentino is more likely to choose -----…

Answered: Florentino Allers is the production…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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 80% probability of making a profit of $1 million and a 20% probability of making a profit of $200,000.
A regular motherboard with a 100% chance of making a profit of $680,000.
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?

B. Which option would the company be more likely to choose and why?

C. What changes should the company make to Florentino’s compensation to avoid unnecessary risks?

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 80% probability of making a profit of $1 million and a 20% probability of making a profit of $200,00o.
• A regular motherboard with a 100% chance of making a profit of $680,000.
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 80% chance of a $1 million profit is much
the $
(even though there is a 20%
chance of a $200,000 profit with the industrial motherboard).
B. Which option would the company be more likely to choose and why?
The company, being a
taker than Florentino, would prefer the regular motherboard because of the certainty of earning $
While the expected value of the
industrial motherboard is $
the potential difference of $
is
to offset the
(20% chance) of only earning
$200,000.
C. What changes should the company make to Florentino's compensation to avoid unnecessary risks?
The company should
the size of the bonus and
the salary, thus leveling the playing field when it comes to risk-taking.

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