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PM Chapter 9 Questions Short-term decision making

 

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  1. Hi John,

    In this scenario at Q-3, the workers are paid for hours that they actually work although there is plenty of idle time that will not be paid as they are not working, correct? so, the opportunity cost has to be considered as how, zero or $8 per hour – kindly explain as the answer here shows as zero but I got 40k as it is to be paid if work – idle time means not working?

      • In this scenario at Q-3, the workers are paid for hours that they actually work although there is plenty of idle time that will not be paid as they are not working, correct? so, the opportunity cost has to be considered as how, zero or $8 per hour – kindly explain as the answer here shows as zero but I got 40k as it is to be paid if work – idle time means not working?

  4. Help me understand Q2 and Q3, Since in Q2 it was stated that the material is in use we bought whole 2000units for 10$ p.u ie 20000$
    and for Q3 it was that the material wasn’t in use we valued at Material at Cost or Value whichever is higher and the remaning for 10$ p.u, ie 1500*9 + 500*10, 18500. Is this correct?

  5. On this question we need 2000kg material, however currently we have 1500 kgs of the material. so basically our relevant cost is the 500kg*10=5000. Plus selling cost of 1500kg *9=13500

    so the answer is 18500

    Help me to understand!

    • I do not think. you can have watched the lectures before attempting the test. The relevant cost of the 1,500 currently in inventory is the lost scrap proceeds of $9 per kg. The remaining 500 kg will need to be purchased at a cost of $10 per kg.

  6. I am a bit confused here, why are questions 2 and 3 repeated and asked as questions 4 and 5? What is the correct answer? I got $18,500 and $100,000….please tell me if I am right or wrong.

  7. Hi John,
    Many thanks for the great lectures! I got 80% for this one..
    Please can you explain why the labour is a relevant cost on question 5 when we were going to pay it anyway. I thought it was only the $12 lost contribution.
    Thanks,
    Beatrice

    • We certainly will be paying the $8 anyway.

      However, let me make up some figures so as to explain ?

      Suppose the revenue per unit is $30, the materials are $10, and the labour is $8. So the contribution is $12.

      If the labour is used on another contract, then we lose the revenue of $30, we save the materials of $10. We still pay the labour of $8 and so the net loss is 30 – 10 = $20. This is always going to be the same as the contribution (12) plus the labour (8).

  8. Hi John,

    Could you please help me with explaining this answer from BPP PM workbook further question solutions regarding SECTION C question 66 AB.
    b) Non- financial factors that must be considered in reaching the decision
    The workforce
    If the recommended course of action is undertaken, the workforce will produce enough units of X in the next 13 weeks to satisfy sales
    demand over the next year (with 18 weeks supply of existing finished goods inventories and a further 35 weeks supply obtainable from
    direct material inventories).
    I cannot understand how the 13 weeks come about, as the company should produce X for extra 33 weeks to use their inventory of the raw materials before switching to produce Y. Could you please help me with this. If you could trace the question, please.
    Thank you.

  9. Sir, In question number 2, It said the materials needs to be replaced, so we skip the opportunity cost & take the current market price? If the material is in regular use, CURRENT PRICE should be chooses over opportunities cost?

  10. in q 5
    the answer is 100 000
    but in the question is giving the contribution which is calculated after subtracting the 8 $ per hour
    cm = p – vc ( labour and material )
    why to calculate it again ?

    • We certainly will be paying the $8 anyway.

      However, let me make up some figures so as to explain ?

      Suppose the revenue per unit is $30, the materials are $10, and the labour is $8. So the contribution is $12.

      If the labour is used on another contract, then we lose the revenue of $30, we save the materials of $10. We still pay the labour of $8 and so the net loss is 30 – 10 = $20. This is always going to be the same as the contribution (12) plus the labour (8).

      • Dear John,
        Can you please explain it using some other example as well? i am still not clear on this. I still think that the labour cost is something we will pay anyway whether we take the new contract or not. By taking the new contract, only the change would be lost contribution of 60,000. How i prepare my mind that 60,000 is not the correct answer… I am not able to understand

      • No. We only assume labour to be fixed in the short-term when using throughput accounting. In relevant costing questions then the way of dealing with labour depends on the wording of the question.

      • Hello.

        This is still unclear to me because the notes mention that losing 12$ of contributions (opportunity cost, relevant) means the workers move from the current project to the new one, they are not extra labour (Sunk costs). I already watched the full lecture but I am still confused.
        How can I identify if the labour is relevant then?

        DP: Very thanks for the lectures.

  11. In question 5,

    My answer was $60000

    $12x5000hrs – contribution lost – relevant

    $8 per hr – labour cost – committed – not relevant

    Correct answer was $100000

    ($12+$8)x5000hrs

    Labour paid $8 per hr – why are those costs not treated as committed costs as they are going to occur any way?

    Thank you

  12. Hi John,

    Thanks for the lectures and practice questions.

    For Q2, I can’t understand why we don’t include the opportunity cost of selling the material in inventory ($1500 x 9) ?
    Presumably, we would sell the material if the contract didn’t go ahead? Shouldn’t this be a relevant cost therefore?

    Thanks in advance.

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