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Dear sir,
I have tried to solve the problem below and watched your lecture a couple of time but i couldnt come up the same solution as Kit exam. So, Pls kindly help me to explaine:A company uses its direct labour workforce to make a product for which the sales price and unit cost are as follows.
$ Direct materials 10
Direct labour (2 hours) 20
Variable overheads (2 hours) 4
Fixed overheads (2 hours) 30
Selling price 80
The workforce is operating at full capacity and it is not possible to obtain any additional labour hours in the near future. A customer has asked the company to perform a special job that would require 20 hours of direct labour time.
What would be the relevant cost of diverting labour from its existing work to perform the special job for the customer?
Thanks you sir in advance.The opportunity cost is the lost contribution plus the labour and variable overheads.
The cost contribution is 80 – (10 + 20 + 4) = 46 per unit.
Therefore the opportunity cost is 46 + 20 + 4 = 70 per unit.Each unit takes 2 hours, so the relevant cost per hour is 70/2 = 35 per hour.
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