Chapter 13, Problem 27BEB

### 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
5 views

# Palakiko’s Fish Taco Hut is a small start-up restaurant in Hanalei. Palakiko recently completed an online risk management course and has identified food safety as his restaurant's top risk Specifically, he is concerned that the potential of spoiled food resulting from inadequate refrigeration and food preparation techniques could drastically increase restaurant costs. The chart below 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, Palakiko estimates that the cost of implementing risk response A is $201,250, and the cost of implementing risk response B is$195,000.Required: 1. Calculate the inherent risk for Palakiko. 2. Calculate the residual risk for Palakiko associated with each of the three risk response alternatives A, B, and C. 3. Calculate the benefit for Palakiko associated with each of the three risk response alternatives A, B, and C. 4. Calculate the net benefit for Palakiko associated with each of the three risk response alternatives A. B, and C. 5. Using net benefit as the criterion, which risk response should Palakiko 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 \$1,000,000 for impact and 40% 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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