[annajour]

Dear Sir,

Thank you for this explanation
Could you please also explain why the approach for materials differs:
– in case of scarce material only lost contribution is taken as relevant cost.

Building upon your example – the current work has a selling price of $20 per unit, a labour cost of $10 per unit, and materials of $8 (say 1 kg) per unit. So the contribution per unit is $2.

Let this 1 kg of material be in stock, $8 being the purchase price. It cannot be replenished for some reason.

If 1 kg of material is taken for a new contract then we lose one unit of current work:
– So we lose the revenue of $20.
– However we also save the labour cost of $10.
– $8 aleady paid for inventory is not a future cash-flow either way – hence no difference between decision options.
– Net benefit forgone is 10 (which is in turn equal to cost of material 8 + contribution 2)

Thanks a lot,
Anna

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