Question

1. 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..

   		Inherent Risk				Risk Response		Residual Risk
   Risk		Likelihood		Impact (on operating costs)		Alternatives		Likelihood		Impact (on operating costs)
   Inadequate refrigeration and food preparation techniques result in costly food spoilage problems for Palakiko.		40%		$1,000,000		A—Invest in new and larger refrigeration units		15%		$325,000
   						B—Design and implement new and improved food preparation training techniques for all employees		35%		$300,000
   						C—Take no action in response to possible new regulation		40%		$1,000,000

   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:

   If an amount is zero, leave it blank or enter "0".

   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.

   A.	$
   B.	$
   C.	$

   3. Calculate the benefit for Palakiko associated with each of the three risk response alternatives A, B, and C.

   A.	$
   B.	$
   C.	$

   4. Calculate the net benefit for Palakiko associated with each of the three risk response alternatives A, B, and C.

   A.	$
   B.	$
   C.	$

   5. Using net benefit as the criterion, which risk response should Palakiko choose to implement?

Answer 1

Answer 1:

Inherent risk for Palakiko = $400,000

Working:

Inherent risk = Likelihood * Impact = 40% * 1000000= $400,000

Answer 2:

Answer 3:

Working:

Answer 4:

:

Working

Answer 5:

Using net benefit as the criterion, Palakiko should choose to implement Risk Response A.

Reason:

Risk response results in highest net benefit.