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Dear John,
I hope this email find you well.
I have a question related to Relevant Costing. The question is as below:
“A company needs 5,000 hours of labour for a contract they have been asked to quote for. The work currently being carried out by our employees is generating a contribution of $12 per hour, and using them on the contract will mean taking them away from their other work, our workers are paid at the rate of $8 per hour.”
A. $60,000
B. $NIL
C. $40,000
D. $100,000The answer was D $100,000, and the calculation was $12 + $8 x 5000hrs
May I ask why the $8 of wages was consider as relevant cost to the contract? As for my understanding, even those we do not receive this new contract, we still have to pay $8 per hour to the workers. But unfortunately, my assumption was wrong. Please, may I seek for your guidance on this?
Thank you,
KumIn future you must ask in the Ask the Tutor Forum if you want me to answer. This forum is for students to help each other.
Here is a short example to explain:
Suppose they are currently making a product that has a selling price of $20 per units, a material cost of $5 per unit, and a labour cost of $7 per unit. So the contribution is $8 per unit. Also, each unit takes 1 hour to make.
If we take away 1 hour for a new product, then we lose the $20 revenue. We save the material cost of $5. But we still still be paying the labour of $7.
Therefore the net cost of taking 1 hour is 20 – 5 = $15. This is the same (and is always the same) as the contribution plus the labour cost ($8 + $7 = $15).
Sorry, to crash the thread. Interesting question and answer. Fear that I might made similar assumption to the original poster. Thank you for the information.
Not only you Mrjonbain. I’ve made similar mistakes as well. I always think since the labour will be paid irrespective of whether the workers work it’s not relevant.
I know better now.
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