Relevant costs

This topic contains 2 replies, has 3 voices, and was last updated by Profile photo of Vipin Vipin 3 years, 11 months ago.

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  • Profile photo of mayfikry

    Can someone help me through this question?

    A company is considering a contract which requires 120 hours of labour. The labour is paid $24/hour , and all the labour available is fully employed in manufacturing the following product:

    Selling price $75
    less variable costs
    Labour $ 36
    Other variable costs $15

    Therefore, Contribution per unit ==== $24

    Okay so first we calculate 120X24=$2880

    but how do i calculate the contribution made per labour? Should it be as contribution per unit or as the cost of the labour inccured in the manufacturing, which is $36?

    Thanks in advance

    Profile photo of mrjonbain

    The important things to consider when considering relevant costing in questions are whether the costs in question are future costs, whether or not they are avoidable and whether or not they involve cash flows. If they are past costs, committed costs or unavoidable costs then they are not relevant costs.Given the information you have supplied and using the above criteria then the relevant cost of the labour is $2880 since this is the contribution that would be lost to the company from producing the existing product and switching to producing the new product ,since the labour force is fully employed, this would be the opportunity cost of using this labour on the new contract.

    Profile photo of Vipin

    labour cost per unit=36(given)
    labour cost per hr=24
    labour hrs per unit=36/24=1.5 hrs

    contribution per unit=24(given)
    contribution per hr=24/1.5=16

    opportunity cost=16*120=1920
    labour cost =24*120=2880

    revelant cost=1920+2880=4800

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