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ACCA Strategic Professional · Strategic Business Leader · Managing, monitoring and mitigating risk

Lantern Foods operates a single factory that produces all of its chilled ready meals. The board is concerned that a fire could stop production for several months. It decides to arrange a contract with a rival manufacturer to produce its meals at short notice if the factory becomes unusable. Which risk response does this decision best represent?

This is risk mitigation through a contingency arrangement. The standby production contract does not stop a fire from happening, but it reduces the impact on operations and revenue if it does. Avoidance would mean abandoning the activity, and acceptance would mean taking no preparatory action.

  1. ARisk avoidance, because the fire risk is eliminated
  2. BRisk mitigation through a contingency arrangement that reduces the impact of the eventCorrect
  3. CRisk acceptance, because no action is taken before the event
  4. DRisk retention through self-insurance

Explanation

The contract does not remove the chance of a fire, but it limits the operational and financial impact if one occurs, which is mitigation through business continuity planning. Avoidance would require ceasing the activity, and acceptance would involve no preparatory action.

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