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.
