Past experience indicates a 75% probability that a reported overhead cost variance is not due to a specific cause (i. e., is attributable to random fluctuations). Past experience also shows that the average cost to investigate the underlying cause of a variance is $1,200 and that the cost to correct an out-of-control process is, on average, $3,800. If the underlying variance is systematic and management decides not to investigate the cause of the variance, the costs are thought to be significant: $28,000. Required:
1. Given the preceding information, what is the expected value of investigating the reported variance? Expected value $ 2,150
2. Prepare a payoff table that summarizes the above information. (Hint: Your table should include cells for combinations of management actions (investigate vs. do not investigate) and states of nature (systematic cause vs. random event), plus cells to represent the expected cost of each management action. States of Nature (prob.) Systematic (25%) Management Action Investigate Don't Investigate Random (75%) Expected Value 2,150 7,000