The Finch Company manufactures modular furniture for the home and uses a monthly variance system

The Finch Company manufactures modular furniture for the home and uses a monthly variance system to control costs of the manufacturing departments. Peter Carter is the supervisor of the assembly department and is reviewing the monthly variance analysis for November:

Standard cost of production materials

$275,000

Materials 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 the unfavourable materials quantity variance:

Estimated cost to investigate the variance

$ 4,000

Estimated probability that the assembly department

is operating properly

90%

If the assembly department is operating improperly:

Estimated cost to make the necessary changes

$ 8,000

Estimated present value of future unfavourable

variances that would be saved by making the

necessary changes

$40,000

Required:

a. Recommend whether or not Finch Company should investigate the unfavourable materials quantity variance.

b. Peter Carter is uncertain about the probability estimate of 90% for proper operation of the assembly department. Determine the probability estimate of the assembly department operating properly that would cause Collins to be indifferent between the two possible actions.

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