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hi john sir, how r u? john sir plz guide me about the following question. i feel that question is not correct. guide me.
a contract for one year is under cosideration for which four skilled employees are needed.
The four employees could b recruited on one year contract at a cost of 40000 per employee. the employees would be supervised by an existing manager who earns 60000 per annum. it is expected that supervision of the contract would take 10% time of the manager timeinstead of recuiting new employees, the company could retrain some existing employees who currently earn 30,000 per year. the training would cost 15000 in total. if these employees were used they would need to be replaced at a total cost of 100,000.
The relevant cost of labour on the contract?
I am assuming that the contract lasts for one year.
We have two choices:
One is to recruit 4 new employees. This will cost 4 x 40000 = 160,000.
(The supervisor is not relevant – he will be paid the same amount whether or not we get the new employees, so no extra cost).The alternative is to retrain existing employees. This will cost 15,000, and in addition we will need to replace them which will cost 100,000. Total cost 115,000.
(Their salaries are not relevant because we will be paying them whether or not we do the contract)We will choose the cheaper of the two choices – retrain existing, and so the relevant cost is 115,000.
(Are you using an old book? Questions like this are no longer in the F2 syllabus – they are asked in Paper F5. You can be asked to get the relevant cash flows for investment appraisal questions – that is the same principle, but they are only simple questions.)
Thank you so much john sir. actually sir this question is in ma2. sir i wanted it to confirm the answer by you. i also find it out 115000, but on book its answer was 100,000. so i got confused. thanks again
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