Hello Matt
I鈥檓 a bit confused at the note 5.
The machine has 4,000h capacity only and this special order will have to steal 2,000 h from an existing job. So I think this 2,000h would have happened anyway no matter we decide to take this special order. So the material o/h cost would be 4,000×3=12,000$
Opportunity cost is 2,000×2= 4,000$
Total= 16,000$

No. To illustrate, suppose the existing job has a selling price of $10 per hour, a materials cost of $5 per hour, and overheads of $3 per hour. So the contribution is $2 per hour.
If hours are taken away from the existing job, the overheads will still be paid. So they will lose revenue of $10 and will save materials of $5. The net cost of taking one hour is 10 – 5 = $5. This is equal to (and will always be equal to) the lost contribution of $2 plus the overheads of $3.

It is the same logic as for all relevant costs. I am guessing you are looking at a specific question where the relevant cost of the labour is the labour cost plus the lost contribution. If so, then it is the same logic as with the materials in my example, but if you are not clear ask in the Ask the Tutor Forum and I will explain it 馃檪

Claire91 says

Hello Matt

I鈥檓 a bit confused at the note 5.

The machine has 4,000h capacity only and this special order will have to steal 2,000 h from an existing job. So I think this 2,000h would have happened anyway no matter we decide to take this special order. So the material o/h cost would be 4,000×3=12,000$

Opportunity cost is 2,000×2= 4,000$

Total= 16,000$

John Moffat says

No. To illustrate, suppose the existing job has a selling price of $10 per hour, a materials cost of $5 per hour, and overheads of $3 per hour. So the contribution is $2 per hour.

If hours are taken away from the existing job, the overheads will still be paid. So they will lose revenue of $10 and will save materials of $5. The net cost of taking one hour is 10 – 5 = $5. This is equal to (and will always be equal to) the lost contribution of $2 plus the overheads of $3.

nmenon3 says

Greetings Sir,

Is there any scenario of relevant cost of labour and variable overheads? how can we proceed with the same.

Thank you in advance

John Moffat says

It is the same logic as for all relevant costs. I am guessing you are looking at a specific question where the relevant cost of the labour is the labour cost plus the lost contribution. If so, then it is the same logic as with the materials in my example, but if you are not clear ask in the Ask the Tutor Forum and I will explain it 馃檪