Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › Short term decision – relevant cost
- This topic has 3 replies, 2 voices, and was last updated 2 years ago by
John Moffat.
- AuthorPosts
- June 27, 2022 at 4:42 pm #659431
hello Mr. John
I am bit lost on a question from `BPP activity 3 of relevant cost of labour.
A Co. is deciding whether to undertake a new contract, 15 hours of labour are required for the contract. labour is currently at full capacity for producing X.
X cost card.
Direct material (10kg*$2) = 20
Direct labour (5 kg*$6) = 30
direct cost = 50
selling price. 75
Contribution 25.what is the cost of using 15 hours of labour for the contract.?
the answer is 165
Variable cost of labour (15hrs*$6) $90
Lost contribution from product X (15hr*$25/5). $75
Total: $165this is the answer in book, without any explanation. I do understand the $90 is the cost for making new item under contract. but I don’t understand why they multiplied the contribution with no. of hours for new item and again decided them by 5. kindly need your help please to get this done.
June 28, 2022 at 7:41 am #659461Each existing unit gives a contribution of $25 but takes 5 hours to produce. Therefore each labour hour used is current earning a contribution of 25/5 = $5 per hour.
The new contact needs 15 hours of labour and so they will lose contribution from the existing product of 15 x $5 – $75.
(Or, to put it another way, given that each of the current units takes 5 hours to make, if they take 15 hours for the new contract they will end up losing 15/5 = 3 units of the existing product. Losing 3 units will lose them 3 x $25 = $75.)
July 17, 2022 at 9:36 pm #660788very clear prof. John. I got the whole point now, so anything that can surplus the gain on existing product and the cost involved to make new product – can be accepted
thank you very much.:)
July 18, 2022 at 8:45 am #661002You are welcome 🙂
- AuthorPosts
- The topic ‘Short term decision – relevant cost’ is closed to new replies.