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

question 23

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. Jalopy Automotive's executives,

• A) if risk-neutral, would fix the flaw because it enables them to have a sure outcome.
• B) if risk-neutral, would fix the flaw because the cost of fixing the flaw is less than the expected cost of not fixing it.
• C) if risk-loving, would fix the flaw because it enables them to have a sure outcome.
• D) if risk-averse, would not fix the flaw because the cost of fixing the flaw is more than the expected cost of not fixing it.
• E) would fix the flaw regardless of their risk preference, because of the large probability of high-cost outcomes.

Understand the measures related to different perspectives of business operations such as financial, customer, internal business processes, and learning and growth.

Identify non-financial measures that may not directly translate into financial outcomes.

Comprehend the application and benefits of using a strategy map in linking scorecard and organization objectives.

Differentiate between various methods of comparison in performance measurement and their adequacy.

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Definitions:

Short-run Production Function

The short-run production function describes the relationship between input and output levels when at least one input (like capital) is fixed and cannot be changed immediately.

Variable Factor

An input in the production process that can be changed in the short term to influence output.

Fixed Factors

Inputs in the production process that cannot be easily increased or decreased in the short term, such as machinery or land.

Perfect Certainty

A situation in decision making where all outcomes are known and there is no ambiguity or risk.