Based on Experience, You Observe the Following Probabilities Regarding the Underlying

question 1

Essay

Based on experience, you observe the following probabilities regarding the underlying cause of an observed cost or revenue variance: the probability, p, of a nonrandom variance equals 0.10, and the probability, 1 − p, of a random variance equals 0.90. If management chooses to investigate, the total cost is $1,000 if it is concluded that the reported variance is a random fluctuation, while the total cost is $6,000 if it is concluded that the variance is the result of a nonrandom (i.e., a systematic) cause (i.e., the incremental cost to correct the variance is $5,000). On the other hand, if an observed variance is not investigated, management expects the following costs: if it is concluded that the variance is due to random causes, the cost would be $0; if it is concluded that the observed variance is due to a nonrandom (i.e., a systematic) cause, the cost would be $30,000.

Given this information, what is the indifference probability, p (i.e., the probability of a nonrandom variance that would make management indifferent between investigating and not investigating the variance)? (Round your answer to one (1) decimal place, for example, 12.3458% = 12.3%.)
A) 3.3%
B) 4.0%
C) 4.2%
D) 10.0%
E) 16.7%

• A) 3.3%
• B) 4.0%
• C) 4.2%
• D) 10.0%
• E) 16.7%

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Definitions:

Western European Nations

Countries located in the Western part of Europe, characterized by developed economies, democratic systems, and a high standard of living.

Social Psychological Research

The study of how individual behavior, thoughts, and feelings are influenced by the actual, imagined, or implied presence of others.

Random Sample

A sample wherein each person in the population has an equal chance of being selected.

Self-correcting Nature

The ability of a system or process to adjust and rectify itself without external intervention.