Comparison of expected benefits with expected costs

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Reference no: EM131341686

Assume that the budgeted cost for a department is $10,000 per week and the standard deviation is $500. The decision to investigate a variance requires a comparison of expected benefits with expected costs. Suppose an unfavorable variance of $1,000 is observed. The normal distribution indicates the probability of observing this variance is 0.0228 if the system is in control. Furthermore, assume that the benefits would be 50% of the variance and that investigation costs are $200. Should this variance be investigated? Assume that the variance is still $1,000, but it is favorable. Should it still be investigated?

Reference no: EM131341686

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