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Cleverclogs is short of labour for a new one-off project needing 600 hours of labour and has choices as to where to source this. He could hire new people temporarily from an agency at a cost of $9 per hour. Alternatively he could recruit new temporary staff at a fixed cost of advertising of $1,200 but then only pay $6 per hour for the time. He could also redirect some staff from existing work who are currently paid $7 per hour and who make sandals that generate a contribution of $3 per hour after all variable costs. Sandals are a good selling product and Cleverclogs will lose the production and the related sales whilst staff is working on the new one-off project. What is the relevant cash flow?
A $1,800
B $3,600
C $4,200
D $4,800
ok D is the right answer because thats least costly but why the current rate of $7 was taken into calculation for the existing labour?that labour is already hired and the hourly rate is not a extra cost ,we are just redirecting our labour hereIt had not been answered because we do not sit in front of the computer 24 hours a day (especially when I am on vacation)!!!
If labour is being diverted then the relevant cost is always the lost contribution plus the labour cost. The labour is still going to be paid, and therefore what is lost is the sales revenue less the other variable costs, which is the same as the contribution plus the labour cost.
ok cool got it
On a side not yesterday you were answering everyone else questions while enjoying your vacations .Only my question was left unanswered.
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