Page 9 - OCS Workbook - Day 1 Suggested Solutions (May 2018)

SUGGESTED SOLUTIONS

EXERCISE 4 – RISK AND UNCERTAINTY
Exercise 4(a) – Key Risks

Question Your response

Identify four • Damage to brand due to quality problems
significant areas • Damage to brand due to excessive price discounting to sell items
of risk for • Damage to reputation due to problems delivering omni-channel
Mansako. strategy
• Erosion of brand due to lack of investment in new products
• Failure to identify and respond quickly enough to changes in consumer
taste

Exercise 4(b) – Expected Values

Response
• EV = 0.6 × 500 + 0.3 × 120 - 0.1 × 250 = + L$310,000 > 0
• Using EV, this would suggest the project is acceptable as the EV is positive.
• Furthermore
o There is a 10% chance of a loss of L$250,000 being incurred for the new
product.
o This is 4% of Mansako’s overall 2017 profits of L$6,487k, so the Board may be
unwilling to take such a risk.
o However, if viewed as a pilot then the Board may be willing to accept this risk
as a loss leader.
• 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).

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