Expected Values (Payoff Tables) - The Finch Company
The Finch Company manufactures modular furniture for the home and uses a monthly variance system tocontrol costs of the manufacturing departments. Peter Carter is the supervisor of the AssemblyDepartment and is reviewing the monthly variance analysis for November:Standard cost of production materials $275,000Materials price variance -0-
Materials quantity variance, unfavourable 19,000
$294,000
Carter has gathered the following information to assist him in deciding whether or not to investigate theunfavourable materials quantity variance:Estimated cost to investigate the variance $ 4,000Estimated probability that the Assembly Departmentis operating properly 90%If the Assembly Department is operating improperly:Estimated cost to make the necessary changes $ 8,000Estimated present value of future unfavourablevariances that would be saved by making thenecessary changes
$40,000
Required -
a. Recommend whether or not Finch Company should investigate the unfavourable materialsquantity variance.
b. Peter Carter is uncertain about the probability estimate of 90% for proper operation of theAssembly Department. Determine the probability estimate of the Assembly Department operating properly that would cause Collins to be indifferent between the two possible actions.