The Wentworth Company Manufactures Modular Furniture for the Home and Uses

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Feedback: The probability estimate of the Assembly Department operating properly, which would cause Collins to be indifferent, is the "indifference probability." In this case it is calculated as 87.5%, as follows:

Answer may vary Feedback: The probability estimate of the Assembly Department operating properly, which would cause Collins to be indifferent, is the indifference probability. In this case it is calculated as 87.5%, as follows: Setting the above two expected values equal, we'd have: p = $4,000 ÷ ($40,000 - $8,000) p = $4,000 ÷ $32,000 = 0.125 Thus, the indifference probability, p, is 12.5%: if the probability that the department's cost structure is out of control (i.e., the observed variance is nonrandom) management would be indifferent between investigating or not investigating the variance, given the above cost estimates. Alternatively, we can view the indifference probability in terms of (1 - p), that is, the probability of a random variance (i.e., the probability that the department's cost are under control) as 87.5%.

Setting the above two expected values equal, we'd have:

p = $4,000 ÷ ($40,000 - $8,000)
p = $4,000 ÷ $32,000 = 0.125
Thus, the indifference probability, p, is 12.5%: if the probability that the department's cost structure is out of control (i.e., the observed variance is nonrandom) management would be indifferent between investigating or not investigating the variance, given the above cost estimates. Alternatively, we can view the indifference probability in terms of (1 - p), that is, the probability of a random variance (i.e., the probability that the department's cost are under control) as 87.5%.

The Wentworth Company Manufactures Modular Furniture for the Home and Uses

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