Chapter 13, Problem 20BEA

### Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

Chapter
Section

### Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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# Using Net Benefit to Evaluate Risk Response AlternativesCooper Movie Studio Corp. makes movies and is interested in lowering its operating costs for the following year, while maintaining the high quality and appeal of its movies. Cooper's management is concerned about the additional costs the company would have to incur if new industry regulation is passed by Congress. The chart at the top of the next page contains a description of this top risk, an inherent risk assessment, three risk response alternatives, and a residual risk assessment for each response alternative.Finally, Cooper’s management accountants estimate that the incremental cost of implementing risk response A is $3,000,000 and the incremental cost of implementing risk response B is$13,000,000.Required: 1. Calculate the inherent risk for Cooper. 2. Calculate the residual risk for Cooper associated with each of the three risk response alternatives A, B, and C. 3. Calculate the benefit for Cooper associated with each of the three risk response alternatives A, B, and C. 4. Calculate the net benefit for Cooper associated with each of the three risk response alternatives A, B, and C. 5. Using net benefit as the criterion, which risk response should Cooper choose to implement?

1.

To determine

Compute inherent risk.

Explanation

Inherent Risk:

Inherent risk is a risk that prevails in a system before any control measure is adopted within an organization.

Computation of inherent risk:

Inherent risk can be computed by using the following formula:

Inherentrisk=Impact×Probabilityofoccurrance

Substitute \$80,000,000 for impact and 30% for the probability of occurrence in the above formula

2.

To determine

Compute residual risk of each of the three alternatives.

3.

To determine

Compute benefit from each of the three alternatives.

4.

To determine

Compute net benefit from each of the three alternatives.

5.

To determine

Identify the alternative which would be adopted by the company.

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