Page 8 - CIMA OCS Workbook May 2019 - Day 1 Tasks

CIMA MAY 2019 – OPERATIONAL CASE STUDY

4 RISK AND UNCERTAINTY

EXERCISE 4(A) – KEY RISKS

Question Your response
Identify four significant areas • High competitive rivalry coupled with low customer brand
of risk for VitaMine. loyalty will put pressure on margins
• Problems if high growth is not controlled – overtrading,
staffing issues, quality issues, financing, etc
• Risk that science reports may show that taking supplements
/ vitamins has little health benefit and may even be
harmful. This could significantly damage demand. Bad
publicity related to a few “incidents” could have a similar
impact on demand.
• Risk of food manufacturers including more minerals and
vitamins in food, reducing the need for supplements
• An economic downturn could seriously reduce demand as
supplements may be viewed as a discretionary purchase
• Increased regulation regarding labelling, claims of efficacy
may boost demand in the industry overall as it will improve
consumer confidence but in the short term it could damage
the viability of specific products.

EXERCISE 4(B) – USING EXPECTED VALUES

• EV = 0.6 × 50 + 0.3 × 12 - 0.1 × 25 = + E$31k > 0
• Using EV, this would suggest the project is acceptable as the EV is positive.
• However
o There is a 10% chance of a loss of E$25,000 being incurred for the 3 months
(equivalent to E$100k per annum). This is material (3%) in terms of VitaMine’s
overall 2018 profits of E$2.9m, so the Board may be reluctant to take such a risk
• Concerns over usefulness of EVs

o EV is a long run average when the project is a one-off decision
o EV cannot happen
o Difficult to estimate probabilities with any certainty
o EV ignores risk profile (see above).

48 KAPLAN PUBLISHING