Reference no: EM132793761

Planet Motors manufactures general and special purpose industrial motors. Planet's management is worried about increasing competition in its industry as a global industrial motor manufacturer has recently shown a keen interest in entering the same customer market as served by Planet. The management is most concerned about the fact that it may lose a significant amount of sales revenue should this competitor make an entry into Planet's market. A description of Planet's top risk, an inherent risk assessment, three risk response alternatives, and a residual risk assessment for each response alternative is provided in the chart given below.
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?RISK

?A global industrial motor manufacturer has recently shown a keen interest in entering the same customer market served by Planet; it may significantly impact Planet's annual sales revenue.

Likelihood                                     50%

Impact (on lost revenues)      $76,000,000

Alternative

A-Sign long-term sales contracts with its three biggest customers before the competitor enters the market

Likelihood                                       25%
Impact     (on lost revenues)        $66,000,000

Alternative

B-Invest in a new quality program with the aim of significantly increasing the performance and quality of its motors so that the new entrant could not match with its quality

Likelihood                                40%
Impact (on lost revenues)            $15,000,000

Alternative

C-Take no action in response to this possible new threat

Likelihood                                         50%
Impact (on lost revenues)      $76,000,000
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It is estimated by Planet's management that the incremental cost of implementing risk response A is $15,000,000 and the incremental cost of implementing risk response B is $14,000,000.
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Required:

Problem A) Calculate the benefit for Planet Motors associated with each of the three risk response alternatives A, B, and C.

Problem B) Calculate the net benefit for Planet Motors associated with each of the three risk response alternatives A, B, and C.

Problem C) Using net benefit as the criterion, which risk response should Planet Motors choose to implement?