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 $170,000. 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.
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 $170,000. 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.
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 $170,000.
- 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.
Transcribed Image Text: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 $170,000o.
• 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
v the $
(even
though there is a 20% chance of a $170,000 profit with the industrial motherboard).
B. Which option would the company be more likely to choose and why?
The company, being a
v 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 $
v to offset the
(20% chance) of only earning $170,000.
C. What changes should the company make to Florentino's compensation to avoid unnecessary risks?
The company should
v the size of the bonus and
the salary, thus leveling the playing field when it comes to risk-taking.
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