This is a sum from the BPP Kit Q19 John Robertson, I got everything right, except the Labour cost, here is the extract from the question regarding the labour cost :
“Robertson will need to be on site whilst the building work is performed. He therefore intends to do 800
hours of the skilled work himself. The remainder will be hired on an hourly basis. The current cost of skilled
workers is $12 per hour. If John Robertson does not undertake the building work for this customer he can
either work as a skilled worker for other builders at a rate of $12 per hour or spend the 800 hours
completing urgently needed repairs to his own house. He has recently had a quotation of $12,000 for labour
to repair his home. “
I took the labour cost as 800 x12 but they have taken the oppurtunity cost of labour as 12000,
But my issue is thats a quotation from a separate person to fix his house ( atleast thats what I understood from the sentence) so how can this be his Oppurtunity Cost ??
The reason is that if he does do the contract, then he has to work on it and so he cannot do the urgent repairs. Because they are urgent they will have to be done, which means having to pay 12000.
So…it is only worth doing the contract if it earns him at least 12000 (plus,obviously, all the other costs).
(Usually an opportunity cost is lost income. Here it is slightly different, but is still not a direct cost for the contract although it still needs including)
Sir my issue is 12000 is the cost for fixing the house, nowhere is it his income, it is his expense on his house that a third party is charging , right ?
And sir this is his cost to pay other people to do up his house, is that if he works on his house he will not have to spend 12000 and that is why this is taken as an oppurtunity cost.. But it’s still not making sense to me, i’m really sorry if I am being unreasonable, I just have a few loose ends in F5 and wanted to finish it by today …
I think you are misreading the question.
If he works on the contract, then he cannot do the work on his house himself and he will have to pay other people 12000 to do it.
So….working on the contract will cost him 12000 that he will not have to pay if he does not work on the contract (because if he does not work on the contract he will do it himself).
So…..there is no point in him doing the contract unless it earns him at least 12000. We include 12000 as a cost of doing the contract because then it makes sure he will only do the contract if the income from it covers the costs.
oh okay thank you for simplifying it sir…. Really !!
You are welcome.
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