Chapter 12, Problem 2PA

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 $150,000

• 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?

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?