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CMA Final · Strategic Performance Management and Business Valuation · Corporate Risk Management Performance

Asha Textiles has a risk register entry with probability of occurrence 0.20 and estimated impact of ₹50 lakh. Management buys a control costing ₹4 lakh that cuts the probability to 0.05 with the impact unchanged. The net benefit of the control (reduction in expected loss less cost) is:

The net benefit is ₹3.5 lakh. Expected loss falls from ₹10 lakh (0.20 × ₹50 lakh) to ₹2.5 lakh (0.05 × ₹50 lakh), a saving of ₹7.5 lakh, from which the ₹4 lakh control cost must be deducted.

  1. A₹7.5 lakh
  2. B₹3.5 lakhCorrect
  3. C₹6 lakh
  4. D₹10 lakh

Explanation

Expected loss before = 0.20 × 50 = ₹10 lakh; after = 0.05 × 50 = ₹2.5 lakh; reduction = ₹7.5 lakh. Less cost ₹4 lakh gives ₹3.5 lakh. The ₹7.5 lakh option forgets to deduct the control cost.

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