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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
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.
Required:
- Calculate the expected returns (ER) for each alternative project. (ER is the weighted average of all the possible outcomes from a project.)
- 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?
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