Scotty Ltd. operates a production line that produces a single product with the following unit manufacturing costs: Direct Materials $210.00 Direct Labour $160.00 Variable Overhead $150.00 Fixed Overhead $100.00 Each unit of product sells for $820 and all units produced can be sold at that price. Production volume is constant at 10 units per day. 

When a variance is detected, a decision must be made whether to shut down the production line to investigate and if necessary, correct the condition causing the variance. Shutting down the line results in the loss of one half day’s production plus $700 in investigation costs. If the process is determined to be out of control, it will cost a further $2,900 to correct the problem and a loss of another half day’s production. If the process is out of control and not corrected, the result will be that three day’s worth of production will have to be reworked at a cost of $120 per unit and a 50% probability that major damage will be done to the machinery which would cost $15,000 to repair. 

Required: 

a) Assume the company estimates that the probability that the line is out of control is 40%. Draw a decision table and determine whether or not the company should investigate the variance. 

b) What would Scotty pay to know, with certainty, whether the line is in or out of control? (What is the expected value of perfect information?)