XXX Companys SS manufacturing process has been producing an unfavorable variance of $2,080 each week for the
Question:
XXX Company’s SS manufacturing process has been producing an unfavorable variance of $2,080 each week for the last two weeks. If the company decides to investigate the variance, it would cost $1,500. During the investigation, the company would lose production of 200 units. If the process is out of control, it would cost $2,500 to correct the process and the company would lose production of another 300 units. These units have a selling price of $16 and outlay costs of $7 to manufacture.
The next scheduled maintenance will be in four weeks. At that time, the overhaul will cost $5,000. If the variance is investigated now, the maintenance will take place in four weeks as scheduled, however the cost of the maintenance will be reduced by $900.
Required:
a) Assuming the probability of the line being out of control is estimated at 40%, should Acme investigate the process now? Solve using a decision table – draw table on next page.
b) What would Acme pay to know, with certainty, whether the line is in or out of control?
Cornerstones of Managerial Accounting
ISBN: 978-0324660135
3rd Edition
Authors: Mowen, Hansen, Heitger