The production department of Uchumi processors Ltd, a juice processing firm, has been experiencing an unfavourable material price variable in the production of a certain brand of juice. As a recently recruited Management Accountant in the firm, the management has asked you to recommend whether an investigation into the variance is necessary. You are of the opinion that if nothing is done and the production process is out of control then the present value of extra cost over the planning horizon is kshs. 17,000,000. The following additional information is available;
1. The cost of investigation is shs. 300,000 and that of correcting the process if out of control is shs. 600,000.
2. There is a 30% chance that the process will be out of control.
Required:
i) Determine if the process should be investigated (4mks)
ii) Determine the level of probability at which you would be indifferent as to whether an investigation is necessary or not. (4mks)