Question 1

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 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%	R60 000 000	A Sign long term sales contracts with its five biggest customers before the competitor enters the market	25%	R50 000 000
			B Invest in a new quality program to significantly increase the performance and quality of its engines beyond the level achieved by the new competitor	40%	R15 000 000
			C Take no action in response to possible new regulation	50%	R60 000 000

Finally, Rockets management accounting team estimates that Rocket would need to spend R10 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 R8 500 000 in additional sales staff travel to complete the long-term contracts. Further, the team estimates that the new quality program would cost R15 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 R5 000 000 on advertising to sufficiently spread the word to customers regarding its significantly improved performance quality.

Required:

1.1 Calculate the net benefit for each of Rockets three risk response alternatives (A, B and C) under consideration.

1.2 Which risk response alternative should Rocket select? Explain your reasoning.

1.3 Under what conditions would risk response alternative C be the preferred alternative?