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 $120,000. A regular motherboard with a 100% chance of making a profit of $660,000. 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? the $ 660,000 (even though there is a 25% chance of a $120,000 profit with the industrial 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 motherboard). B. Which option would the company be more likely to choose and why? . While the expected value of the industrial motherboard is $ 1,000,00 % higher , the The company, being a lower risk taker than Florentino, would prefer the regular motherboard because of the certainty of earning $ 660,000 potential difference of $ 340,000 X is not enough to offset the higher risk (25% chance) of only earning $120,000. C. What changes should the company make to Florentino's compensation to avoid unnecessary risks? The company should reduce the size of the bonus and increase the salary, thus leveling the playing field when it comes to risk-taking. Feedback Check My Work A. For a risk taker, what profit level is more attractive? Think of risk taken and the associated potential for the reward for doing so. B. Consider options that are certain versus others that have risks with no guarantee of desired results. How much of a difference would there need to be between the two choices to play a role in this decision? C. Consider the incentives in place to influence risk taking. What changes could be made to minimize this incentive and subsequently the desire to take risks? Jefferson Memorial Hospital is an investment center as a division of Hospitals United. During the past year, Jefferson reported an after-tax income of $7 million. Total interest expense was $3,100,000, and the hospital tax rate was 30%. Total assets totaled $69.9 million, and non-interest-bearing current liabilities were $23,300,000. The required rate of return established by Jefferson is equal to 17% of invested capital. What is the residual income of Jefferson Memorial Hospital? Enter your answer in whole dollar. $ 5,811,700 X Feedback Check My Work Invested capital is determined using total assets and non-interest-bearing current liability amounts. Net operating income after taxes must then be determined which uses net income, interest expense after subtracting the portion related to tax savings. Residual income uses net operating income after tax, the cost of capital percentage, and invested capital in its calculations. Refer to the text for the formulas to be used implementing the components mentioned above
