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 70% probability of making a profit of $1 million and a 30% probability of making a profit of $180,000. A regular motherboard with a 100% chance of making a profit of $700,000. 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 70% chance of a $1 million profit is much higher than the $fill in the blank 2 (even though there is a 30% chance of a $180,000 profit with the industrial motherboard). 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 $fill in the blank 4. While the expected value of the industrial motherboard is $fill in the blank 5 , the potential difference of $fill in the blank 7 is not enough to offset the higher risk (30% chance) of only earning $180,000.

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 70% probability of making a profit of $1 million and a 30% probability of making a profit of $180,000.
A regular motherboard with a 100% chance of making a profit of $700,000.
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 70% chance of a $1 million profit is much higher than the $fill in the blank 2 (even though there is a 30% chance of a $180,000 profit with the industrial motherboard).

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 $fill in the blank 4. While the expected value of the industrial motherboard is $fill in the blank 5 , the potential difference of $fill in the blank 7 is not enough to offset the higher risk (30% chance) of only earning $180,000.

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 70% probability of making a profit of $1 million and a 30%
probability of making a profit of $180,000.
• A regular motherboard with a 100% chance of making a profit of $700,000.
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 70% chance of a $1
million profit is much higher than v
the $
(even though there is a 30% chance of a
$180,000 profit with the industrial motherboard).
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 $
the potential difference of $
is
not enough
to offset the higher risk
(30% chance) of only earning $180,000.
C. What changes should the company make to Florentino's compensation to avoid unnecessary risks?
The company should reduce v
the size of the bonus and increase
the salary, thus leveling
the playing field when it comes to risk-taking.

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