Based on Experience, You Observe the Following Probabilities Regarding the Underlying

Essay

Based on experience, you observe the following probabilities regarding the underlying cause of an observed cost or revenue variance: the probability, p, of a nonrandom variance equals 0.10, and the probability, 1 − p, of a random variance equals 0.90. If management chooses to investigate, the total cost is $1,000 if it is concluded that the reported variance is a random fluctuation, while the total cost is $6,000 if it is concluded that the variance is the result of a nonrandom (i.e., a systematic) cause (i.e., the incremental cost to correct the variance is $5,000). On the other hand, if an observed variance is not investigated, management expects the following costs: if it is concluded that the variance is due to random causes, the cost would be $0; if it is concluded that the observed variance is due to a nonrandom (i.e., a systematic) cause, the cost would be $30,000.

Given this information, what is the indifference probability, p (i.e., the probability of a nonrandom variance that would make management indifferent between investigating and not investigating the variance)? (Round your answer to one (1) decimal place, for example, 12.3458% = 12.3%.)
A) 3.3%
B) 4.0%
C) 4.2%
D) 10.0%
E) 16.7%