Laune Co.'s standard cost is £200,000, and its allowable deviation is £20,000. Laune's upper and lower control limits are
A)£220,000 and £200,000.
B)£200,000 and £180,000.
C)£220,000 and £180,000.
D)£210,000 and £190,000.

Question

Quizplus · Accepted Answer

According to the information given, Pippen Company's actual inspection costs for 50 inspections were £100,000. Therefore, the average cost per inspection is £2,000 (£100,000/50 inspections). The fixed inspection costs consist of the salaries of two inspectors, who are capable of efficiently conducting inspections of 30 batches each. Therefore, the fixed cost per batch is £475 (£14,250/30 batches). 
To determine the variable inspection costs per batch, we subtract the fixed costs per batch (£475) from the total cost per batch (£2,000) to get £1,525. 
Laune Co.'s standard cost is £200,000 with an allowable deviation of £20,000. Therefore, the upper control limit is £220,000 (£200,000 + £20,000) and the lower control limit is £180,000 (£200,000 - £20,000). The actual cost of Pippen Company is £150,000 (£100,000 + (50 inspections x £1,525 variable cost per inspection)). Since £150,000 falls within Laune Co.'s control limits, it is within an acceptable range and no corrective action needs to be taken. Therefore, the best choice is C.

Laune Co'S Standard Cost Is £200,000, and Its Allowable Deviation Is