Past experience indicates an 85 percent 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 $750 and that the cost to correct an out-of-control process is, on average, $3,000. If the underlying variance is systematic and management decides not to investigate the cause of the variance, the costs are thought to be significant: $25,000.

Average cost to investigate the cause of a reported variance = I =						$ 750
Average cost to correct an out-of-control process if a
	non-random cause for the variance is found = C =					$ 3,000
Expected loss from not correcting an out-of-control process = L =						$ 25,000
Probability that a reported variance is due to a non-random cause =						15.00%

Required

Set up an Excel spreadsheet to answer the following questions:

1. Given the preceding information, what is the expected value of investigating the reported variance?

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.

3. Given the above information, what is the probability level, p, for nonrandom variance that makes management indifferent between the two courses of action: investigate versus do not investigate?