Using Net Benefit to Evaluate Risk Response Alternatives

Cooper Movie Studio Corp. makes movies and is interested in lowering its operating costs for the following year, while maintaining the high quality and appeal of its movies. Cooper's management is concerned about the additional costs the company would have to incur if new industry regulation is passed by Congress. The chart at the top of the next page contains a description of this 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 operating costs) Alternatives Likelihood Impact(on operating costs)

Poor behavior by others 30% $80,000,000 AShare Cooper's effective 20% $80,000,000

Congress passing costly marketing processes with competitors

new legislation that to help mitigate poor industry behavior

regulates the behavior

of all movie studios. B-Lobby congress on behalf of movie 15% $50,000,000

industry generally and cooper in particular

c. Take No action in response to possible 20% $80,000,000

new regulation.

Finally, Cooper's management accountants estimate that the incremental cost of implementing risk response A is $3,000,000 and the incremental cost of implementing risk response B is $13,000,000.

Required:

If an amount is zero, leave it blank or enter "0".

1. What is the inherent risk for Cooper.

$

2. What is the residual risk for Cooper associated with each of the three risk response alternatives A, B, and C.

A. $

B. $

C. $

3. What is the benefit for Cooper associated with each of the three risk response alternatives A, B, and C.

A. $

B. $

C. $

4. What is the net benefit for Cooper associated with each of the three risk response alternatives A, B, and C.

A. $

B. $

C. $

5. Using net benefit as the criterion, which risk response should Cooper choose to implement?

The risk response alternative with the greatest net benefit is alternative