Question: The CFO of PKD Corporation is very
The CFO of PKD Corporation is very uncomfortable with its current risk exposure related to the possibility of business disruptions. Specifically, PKD is heavily involved in E-business, and its internal information systems are tightly interlinked with its key customers’ systems. The CFO has estimated that every hour of system downtime will cost the company about $10,000 in sales. The CFO and CIO have further estimated that if the system were to fail, the average downtime would be one hour per incident. They have anticipated that PKD will likely experience 50 downtime incidents in a given year due to internal computer system problems and another 50 incidents per year due to external problems—specifically, system failures with the Internet service provider (ISP). Currently, PKD pays an annualized cost of $150,000 for redundant computer and communication systems, and $100,000 for ISP support just to keep the total expected number of incidents to 100 per year.
Required:
A. Given the information provided thus far, how much ($) is the company’s current expected residual risk?
B. A further preventive control would be to purchase and maintain more redundant computers and communication lines where possible, at an annualized cost of $100,000, which would reduce the expected number of downtime incidents to 15 per year due to internal computer system problems. What would be the dollar amount of PKD’s current residual expected risk at this point?
C. An external threat still prevails; that is, the ISP could cause the business interruption. Hence, another preventive control would be to increase the annual service fee the company pays to its ISP to a higher level of guaranteed service, based on the following schedule:
Would you purchase a higher level of service from the ISP? If so, what level of service would you purchase? Please defend your answer both quantitatively and qualitatively.
Transcribed Image Text:
Guaranteed Maximum Number of Downtime Incidents per Year Annual Cost of Service Support 50 $100,000 (current contract) 40 $150,000 30 $200,000 20 $300,000 10 $425,000 $550,000
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