13.01

Using Net Benefit to Evaluate Risk Response Alternatives

Rocket Motors manufactures sterndrive engines for pleasure craft boats. Rockets management is concerned about increasing competition in its industry, resulting from a very large international boat motor manufacturer that appears to be seriously considering entering the same customer market served by Rocket. Specifically, management is most worried about the sales revenue it might lose should this international competitor enter Rockets market. The chart below contains a description of Rockets top risk, an inherent risk assessment, three risk response alternatives, and a residual risk assessment for each response alternative.

	Inherent Risk			Risk Response	Residual Risk
Risk	Likelihood		Impact (on lost revenues)	Alternatives		Likelihood		Impact (on lost revenues)
A large international competitor enters the same market served by Rocket, thereby significantly decreasing Rockets annual sales revenue.	50%		$60,000,000	ASign long-term sales contracts with its five biggest customers before the competitor enters the market		25%		$50,000,000
				BInvest in a new quality program to significantly increase the performance and quality of its engines beyond the level achieved by the new competitor		40%		$15,000,000
				CTake no action in response to possible new regulation		50%		$60,000,000

Finally, Rockets management accounting team estimates that Rocket would need to spend $10,000,000 in product giveaways on each of its five biggest customers in order to convince them to sign long-term sales contracts with Rocket. Also, the team believes that Rocket would incur $8,500,000 in additional sales staff travel to complete the long-term contracts. Further, the team estimates that the new quality program would cost $15,000,000 in order to attain the higher level of performance quality necessary to set Rocket apart from its potential new competitor. Finally, Rocket forecasts that it would need to spend an additional $5,000,000 on advertising to sufficiently spread the word to customers regarding its significantly improved performance quality.

Required: 1. Calculate the net benefit for each of Rockets three risk response alternatives (A, B, and C) under consideration. Use minus sign to indicate the negative values. If an amount is zero, enter "0".

Net benefit for A		$
Net benefit for B		$
Net benefit for C		$