Variance Investigation Costs and Benefits: Hurst Cartoon Products Corp. manufactures T-shirts, buttons, stuffed toys, and other goods using the motif of cartoon characters. If a process is out of control, costs are relatively low since a lot of goods can be sold as "seconds" at a slight markdown from the regular price. The following table shows the costs related to the time the stuffed-toy process is out of control and the probability of investigation for each period:

Required:

a. What is the expected cost of having the stuffed-toy process remain out of control assuming that the process has just gone out of control?

b. What is the potential savings in costs of allowing its process to remain out of control if Hurst were to change its investigation rules such that the probability of investigation in period I increased from .10 to .20 and the probability of investigation in all other periods remained the same?

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Additional Time Out-of- Control 1 Out-of-Control Costs This Period $ 4,000 Probability of Investigation .10 23456 7,000 .25 15,000 .35 37,000 .55 78,000 .70 6 122,000 1.00