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Hi Sir John,
I am just confused on one of the questions I got in revision kit of Kaplan.
It says The Total cost for component is $ 12.5 includes other fixed costs of $2. Direct Labour cost of $4,materials $3, Variable O/H $1, specific fixed cost $2.5.
If the direct labour cost is not used to produce the component, it would be used to increase the production of another item for which there is unlimited demand. The other item has the contribution of $10 pu but requires $8 of labour per unit.
The question asks the maximum price per component, at which buying is preferable to internal manufacture.
When I checked the answer it shows, direct labour of $9. which is calculated as cont. foregone 10/2+direct labour 4.
I didn’t understand from where that 2 came in the contribution foregone.
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