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Dear Tutor, I understand that the fixed cost of $4,000 is a sunk cost and therefore irrelevant. However, I am unsure about the $200 per week lost contribution. Why should we not add this to the $500 penalty amount? Is it because of the sentence: “Since there is no other work scheduled for their engineers in one week’s time”? Could you please clarify this point for me?
(2) The installation is expected to take one week to complete and would require three engineers, each of whom is paid a monthly salary of $4,000. The engineers have just had their annually renewable contract renewed with T Co. One of the three engineers has spare capacity to complete the work, but the other two would have to be moved from Contract X in order to complete this one. Contract X generates a contribution of $200 per engineer per week. There are no other engineers available to continue with Contract X if these two engineers are taken off the job. It would mean that T Co would miss its contractual completion deadline on Contract X by one week. As a result, T Co would have to pay a one-off penalty of $500. Since there is no other work scheduled for their engineers in one week’s time, it will not be a problem for them to complete Contract X at this point.
Question: What figure should be included in the relevant cost statement for enginees’ costs?
The relevant cost statement for the engineers’ costs should include the penalty of $500 for missing the contractual deadline on Contract X.
The salaries of the engineers are considered sunk costs and therefore irrelevant, as they will be paid regardless of whether they work on this contract or not.
Since there is no other work scheduled for the engineers in that week, the lost contribution from Contract X is not considered relevant because the engineers will still be able to complete it later.
Thus, the only additional cost incurred is the penalty for the delay.
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