The CFO of Exeter Corporation Is Very Uncomfortable with Its

question 104

Essay

The CFO of Exeter Corporation is very uncomfortable with its current risk exposure related to the possibility of business disruptions.Specifically, Exeter is heavily involved with e-business and its internal information systems are tightly interlinked with its key customers' systems.The CFO has estimated that every hour of system downtime will cost the company about $5,000 in sales.The CFO and CIO have further estimated that if the system were to fail, the average downtime would be about 2 hours per incident.The have anticipated (assume with 100% annual probability) that Exeter will likely experience 10 downtime incidents in a given year due to internal computer system problems, and another 10 incidents per year due to external problems; specifically system failures with the Internet service provider (ISP).Currently, Exeter pays an annualized cost of $25,000 for redundant computer and communication systems, and another $25,000 for Internet service provider (ISP) support just to keep total expected number of incidents to 20 per year.Required:
a.Given the information provided thus far, how much ($) is the company's current expected gross risk?
b.A further preventative control would be to purchase and maintain more redundant computers and communication lines where possible, at an annualized cost of $30,000, which would reduce the expected number of downtimes per year to 5 per year due to internal computer system problems.What would the dollar amount of Exeter's current residual expected risk at this point?

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Definitions:

Market Value

The current price at which an asset or service can be bought or sold in a marketplace, influenced by supply and demand.

Split-Off Point

The stage in a joint production process where multiple products become separately identifiable, leading to allocation of joint costs.

Joint Costs

Joint Costs refer to costs incurred during the production process that are shared by multiple products and cannot be individually attributed to a single product.

Direct Method

An approach in cash flow statement preparation where major classes of gross cash receipts and payments are disclosed.