Due to data errors occurring from time to time in processing the Albert Company's payroll, the company's management is considering the addition of a data validation control procedure that is projected to reduce the risk of these data errors from 13% to 2%.The cost of the payroll reprocessing is estimated to be $11,000.If the data validation control procedure is implemented, the cost of this procedure is expected to be $700 per pay period (employees are paid biweekly).Based on the above data, which of the following statements is true?
A)The data validation control procedure should be implemented because its net estimated benefit is $1,210
B)The data validation control procedure should be implemented because its net estimated benefit is $510
C)The data validation control procedure should not be implemented because the $700 expected cost per pay period exceeds the procedure's expected benefit
D)The data validation control procedure should not be implemented because its net estimated benefit is a negative $1,210, thereby causing the control procedure to fail in terms of being cost effective

Question

Quizplus · Accepted Answer

The net estimated benefit is calculated by first determining the expected savings from reducing the error rate from 13% to 2%. Assuming the $11,000 cost for reprocessing is an annual figure and knowing there are 26 pay periods in a year (biweekly payments), the cost of the data validation procedure is $700 * 26 = $18,200 annually. The savings from reducing errors is (13% - 2%) * $11,000 = 11% * $11,000 = $1,210. Subtracting the annual cost of the procedure from the savings gives $1,210 - $18,200 = -$16,990. However, the correct interpretation involves understanding the reduction in error rate leads to fewer instances of incurring the $11,000 reprocessing cost, not direct savings of $1,210. The calculation provided in the choices seems to misinterpret the savings or costs involved, but based on the options given and typical analysis, the expected benefit calculation seems to aim for an understanding of cost savings versus new costs introduced, which isn't directly calculable from the information provided without making assumptions about the frequency and cost of errors beyond the reprocessing fee. Thus, the correct choice is based on the principle that implementing the procedure is beneficial due to reduced error rates, but the exact net benefit calculation provided in the options doesn't align with standard financial analysis based on the given data.

Due to Data Errors Occurring from Time to Time in Processing