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Hi sir, guide me about the following question. i could’t got it, plz explain it:
An information technology consultancy firm has been asked to do an urgent job by a client, for which a price of $2500 has been offered. The job would require the following.
a. 30 hours’ work from one member of staff, who is paid on an hourly basis, at a rate of $20 per hour, but who would normally be employed on work for clients where the charge-out rate is $45 per hour. No other member of staff is able to do the member of staff in question’s work. ( sir i’m trying to use a structure of relevant costs given on the book but that is not working for this question)
b. The use of 5 hours of mainframe computer time, which the firm normally charges out to external users at a rate of $50 per hour. Mainframe computer time is currently used 24 hours a day, 7 days a week.
c. supplies and incidental expenses of $200.
Required: The relevant cost or opportunity cost of the job.
Although I will answer your question, this is no longer examinable in Paper F2! (It was removed from F2 some time ago, and is not examinable until Paper F5).
a) at present, the employee is being charged to clients at $45 per hour. So if he/she is taken off the work to do this new job, then we have to charge them at least $45 per hour to make it worthwhile. So total cost 30 x $45 = $1350
b) this is really a poor question because it depends on assumptions. I would assume that since it is computer time, then using 5 hours for this job will not actually cost any extra (and would not mean 5 hours less available for other work). So the relevant cost is zero. (If it were to mean that we would have to cut other work by 5 hours then it would be costing us 5 x $50 = $250, but I do not think that is likely.)
c) This is just $200 and no problem
I hope that helps 🙂
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