Variance Investigation Costs and Benefits: Micro Parts, Inc., manufactures silicon wafers used in semiconductor chip assem- blies. The company operates under a contract with Mega Mainframes. Part of the contract requires that the silicon wafers meet certain tolerances. If the silicon wafers do not meet these specifications, Micro Parts could lose its contract. Since Micro Parts operates a highly automated system, there is always a chance that its system will go out of control. If the system goes out of control for a short period of time, the costs of the out-of-control process are relatively low. However, if the process is out of control for a long enough period, the costs escalate rapidly. The following table shows the costs related to the time the silicon wafer process is out of control and the probability of investigation for each period:

Required:

a. What is the expected cost of having the 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 Micro Parts, Inc. were to change its investigation rules such that the probability of investigation in period I increased from .20 to .60 and the probability of investigation increased from .45 to .75 in period 2?

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Additional Time Out-of- Control Out-of-Control Costs This Period $ 18,000 Probability of Investigation 12345 .20 49,000 .45 177,000 .85 350,000 .95 1,900,000 1.00