Refer to the Following Situation:
a Firm Is Making Production

question 5

Multiple Choice

Refer to the following situation:
A firm is making production plans for next quarter, but the manager does not know what the price of the product will be next month. She believes there is a 30 percent chance price will be $500 and a 70 percent chance price will be $750. The four possible profit outcomes are:
$$\begin{array} { l c c } & \text { Prod (toss) when pice is: } \\\hline & \$ 500 & \$ 750 \\\hline\text { Option } A \text { produce } 1,000 \text { unids } & - \$ 12,000 & \$ 80,000 \\\text { Oplion } B \text { produce } 2,000 \text { unids } & \$ 20,000 & \$ 150,000\end{array}$$
-Which option has the highest (absolute) risk?

• A) Option A is riskier than Option B.
• B) Option B is riskier than Option A.
• C) Both options have the level of risk if the manager is risk averse.
• D) cannot calculate risk with the given information

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Definitions:

Adjusting Entries

Journal entries made in accounting records at the end of an accounting period to update the accounts for any accruals and deferrals that were not recorded during the accounting period.

Accounting Cycle

A series of steps performed during an accounting period, starting with recording transactions and ending with the preparation of financial statements.

Balance Sheet

An inventory of a company's financial resources, debts, and shareholders' stake, captured at a particular moment.

Income Statement

A financial statement that shows a company's revenues and expenses over a specific period of time, resulting in a net income or loss.