Question

f there is a 90 percent chance that an observed variance is random, the cost of conducting an investigation is $900, the cost to correct a variance if the investigation reveals a nonrandom cause, and the amount of loss a company expects to incur if it does not investigate a variance that had a nonrandom cause is $17,000, what is the expected cost (to the nearest whole dollar) of not investigating the variance?

Multiple Choice

• $17,000.

• $200.

• $0.

• $2,600.

• $1,700.

Answer 1

Loss from random variance = probability * loss = 0.90 * $0 = $0

Loss from non - random variance = probability * loss = 0.10 * $17,000 = $1,700

Expected cost of non - investigation = Loss from random variance + Loss from non random variance = 0 +$1,700 = $1,700