Incremental labour cost

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  • Profile photo of marinayezhelya

    Hello John. The question # 21 Sniff Limited (BPP, 12/07 ammended). Its not clear for me how came that incremental labour cost for extra work was $100/ per hour ? solution : Labour 500 hrs x $100/hr= 50,000 700 hrs x $100/hr = 70,000.
    Could you please explain this for me

    Profile photo of John Moffat
    John Moffat

    It is because the labour is currently fully employed making the standard product.

    Therefore if they ‘steal’ the labour, the cost is the normal labour cost per hour plus the lost contribution from what they would normally be doing.

    Normally they make perfume, which earns a contribution of $170 for every 1000 litres. 1000 litres take 2000 hours to make, and so the contribution per hour is 170/2 = $85.

    Labour is paid $15 per hour, and so the total cost of using the labour elsewhere is $15 + $85 = $100 per hour.

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