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
Materials price variance
Materials quantity variance, unfavourable
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
Estimated probability that the assembly department
is operating properly
If the assembly department is operating improperly:
Estimated cost to make the necessary changes
Estimated present value of future unfavourable
variances that would be saved by making the
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.