Principles of Accounting Volume 2
19th Edition
ISBN: 9781947172609
Author: OpenStax
Publisher: OpenStax College
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Textbook Question
Chapter 12, Problem 2PB
Oleg Markov is the production manager of NASA Solvents. Due to limited capacity, the company can only produce one of two possible products:
• an industrial concentrated solvent with a 15% probability of making a profit of $1 million and an 85% probability of making a profit of $200,000
• a household diluted solvent with a 100% chance of making a profit of $310,000 Oleg will get a 20% bonus from his department. Oleg has the responsibility to choose between the two products and is more risk averse than most of the top management at NASA Solvents.
A. Which option is Oleg 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 Oleg’s compensation to encourage managers to take appropriate risks
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Oleg Markov is the production manager of NASA Solvents. Due to limited capacity, the company can only produce one of two possible products:
an industrial concentrated solvent with a 15% probability of making a profit of $1 million and an 85% probability of making a profit of $200,000
a household diluted solvent with a 100% chance of making a profit of $310,000
Oleg will get a 20% bonus from his department. Oleg has the responsibility to choose between the two products and is more risk averse than most of the top management at NASA Solvents.
Which option is Oleg more likely to choose and why?
Which option would the company be more likely to choose and why?
What changes should the company make to Oleg’s compensation to encourage managers to take appropriate 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 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.
Which option is Florentino more likely to choose and why?
Which option would the company be more likely to choose and why?
What changes should the company make to Florentino’s compensation to avoid unnecessary risks?
Solution
A.
B.
C.
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…
Chapter 12 Solutions
Principles of Accounting Volume 2
Ch. 12 - Components of the organization that are...Ch. 12 - When managerial accountants design an evaluation...Ch. 12 - Goal congruence in well-designed performance...Ch. 12 - Responsibility accounting holds managers...Ch. 12 - Performance measures are only useful if _______....Ch. 12 - Which of the following is not a characteristic of...Ch. 12 - A good performance measurement system will align...Ch. 12 - What should an organization do if performance...Ch. 12 - A good performance measurement system will include...Ch. 12 - Without proper performance measures, goal...
Ch. 12 - Dixon Construction Materials has collected this...Ch. 12 - The cost of equity is _______. A. the interest...Ch. 12 - Which of the following measures the profitability...Ch. 12 - The capital structure of Ridley Enterprises Is:...Ch. 12 - Calculate the ROI for Gardner Chemical given the...Ch. 12 - Which of the following statements is false? A. The...Ch. 12 - The metrics based on nonfinancial information are...Ch. 12 - The metrics based on financial numbers produced by...Ch. 12 - People affected by decisions made by a company,...Ch. 12 - The owners of company stock are ______. A....Ch. 12 - Why might a manager focused solely on accounting...Ch. 12 - Is there a way to prevent managers from focusing...Ch. 12 - Should an organization focus on controllable or...Ch. 12 - What are the components of a strategic plan? Find...Ch. 12 - What are the four types of centers and their...Ch. 12 - What would be wrong with using two points of data...Ch. 12 - Compare and contrast short- and long-term goals...Ch. 12 - Can a short-term goal also be a long-term goal?...Ch. 12 - What does goal congruence mean? Provide an example...Ch. 12 - What are the six characteristics of a good...Ch. 12 - What is EVA and why is it superior to other...Ch. 12 - What are the drawbacks to ROI? Give examples of...Ch. 12 - Describe the history and purpose of the balanced...Ch. 12 - What are the characteristics of successful...Ch. 12 - For the following situations, identify whether the...Ch. 12 - For the following descriptions state whether the...Ch. 12 - Identify the type of responsibility center...Ch. 12 - Sara has just taken a job as the middle school...Ch. 12 - During the current year, Sokowski Manufacturing...Ch. 12 - During the current year, Sokowski Manufacturing...Ch. 12 - Assume Skyler Industries has debt of $4,500,000...Ch. 12 - Why do managers want a high ROI, and how would...Ch. 12 - Classify each of the following performance...Ch. 12 - For the following situations identify whether the...Ch. 12 - For the following descriptions, state whether the...Ch. 12 - Identify the type of responsibility center...Ch. 12 - Padma completed her doctoral degree and has taken...Ch. 12 - During the current year. Plainfield Manufacturing...Ch. 12 - During the current year, Plainfield Manufacturing...Ch. 12 - Assume Plainfield Manufacturing has debt of...Ch. 12 - Though a high ROI is desired, what are some...Ch. 12 - Classify each of the following performance...Ch. 12 - Match each of the following with its appropriate...Ch. 12 - Florentino Allers is the production manager of...Ch. 12 - Macon Mills is a division of Bolin Products. Inc....Ch. 12 - Jefferson Memorial Hospital is an investment...Ch. 12 - Crawfords Books and Things has a traditional...Ch. 12 - Coral Creations has strategic plans that call for...Ch. 12 - Match each of the following with its appropriate...Ch. 12 - Oleg Markov is the production manager of NASA...Ch. 12 - Evaluate the two departments for Moxie Products....Ch. 12 - Banyan Industries has two divisions, a tax rate of...Ch. 12 - Forty years ago, Vinfen was founded as a nonprofit...Ch. 12 - What combination of quantitative factors and...Ch. 12 - Josh OShea is the manager of the...Ch. 12 - Kanye Achebe just became the operations manager of...Ch. 12 - Which of the performance measures—ROI, RI, or...
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