Scenario 5.5: Engineers at Jalopy Automotive Have Discovered a Safety Flaw in Flaw

question 50

Multiple Choice

Scenario 5.5:
Engineers at Jalopy Automotive have discovered a safety flaw in their new model car. It would cost $500 per car to fix the flaw, and 10,000 cars have been sold. The company works out the following possible scenarios for what might happen if the car is not fixed, and assigns probabilities to those events:
Scenario Probability Cost
A. No one discovers flaw .15 $0
B. Government fines firm .40 $10 million
(no lawsuits)
C. Resulting lawsuits are lost .30 $12 million
(no government fine)
D. Resulting lawsuits are won .15 $2 million
(no government fine)
-Refer to Scenario 5.5. Which of the following statements is true?

• A) The expected cost of not fixing the car is less than the cost of fixing it.
• B) The expected cost of not fixing the car is greater than the cost of fixing it.
• C) It is not possible to tell whether the expected cost of fixing the car is less than the cost of fixing it, because the probabilities are subjective.
• D) It is not possible to tell whether the expected cost of fixing the car is less than the cost of fixing it, because the probabilities are not equal.

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Definitions:

Static Budget

A budget set for a specific level of activity that does not change, even if actual levels of activity change.

Total Overhead Cost

The comprehensive sum of all indirect costs involved in operating a business, not directly tied to a specific product or service.

Planning Budget

A budget prepared in advance of a specific budget period, serving as a financial plan for achieving strategic goals.

Other Expenses

Costs that do not directly relate to the primary business activities, such as interest payments or losses from asset sales.