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hi,
it is question of relevant costing from BPP revision kit
it is Q # 32 Telephone Co
Note 2
the installation is expected to take one week to complete and would require three engineers each of the following is paid monthly salary of $4000. the engineers just had their annually renewable contract renewed with T Co. One of the three engineers has spare capacity to complete the work, but other two have to be moved from Contract X in order to complete this one. Contract X generates a contribution generates the contribution of $5 per engineer hour.there are no other engineers to continue the Contract X if these two companies are taken off the job it would mean that T Co would miss it contractual deadline of Contract X by one week. As a result T Co would have to pay a one-off penalty of $5000. Since there is no other work for scheduled for their engineers in one week’s time it will not be a problem for them to complete Contract X at this point
PROBLEM I AM FACING
I know Salary of engineers Are Ir-relevant
Penalty Is relevant
but how to treat lost Contribution per engineer hour.
whether it is lost relevant cost or not and how ?Note 6
120 telephones handsets would need to be supplied to Push co the current cost of these is $18.20 each,although T Co already has 80 telephone handsets in inventory these were brought at $16.80 each. The handsets are the most popular model on the market and frequently requested by T Co’s customersProblem I am Facing in this Question
Inventory of 80 telephone handsets is relevant or not and how ?Note 2 – lost contributions relevant. It is an opportunity cost.
Note 6 – the inventory is relevant because if they are used in the contract they will need to be replaced (because they are frequently requested by existing customers).
All of this is explained in my free lectures on relevant costing. The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.
(Does your BPP Kit not show the workings for their answer to the question?)
Note 2
in answer of the Note 2, lost contribution is not treated as relevant cost they just treated penalty of $5000 as relevant cost.Yes – because it would be cheaper to pay the penalty. When there is a choice like this then we choose the cheapest relevant cost.
Again, have you watched there lectures?
sir for relevant cost, we choose which one is cheaper is it?
between lost contribution ($8 hours X $5 per hour X 2 engineer X 7 days)= $560
and penalty =$500,so the cheaper one is included as relevant cost, as its cheaper?
bcos based on my understanding, company would like to incur a cheaper cost for their decision makingWe certainly do choose the cheapest option. However I have no idea where your figures are coming from because you do not state which question it is.
the installation is expected to take one week to complete and would require three engineers each of the following is paid monthly salary of $4000. the engineers just had their annually renewable contract renewed with T Co. One of the three engineers has spare capacity to complete the work, but other two have to be moved from Contract X in order to complete this one. Contract X generates a contribution generates the contribution of $5 per engineer hour.there are no other engineers to continue the Contract X if these two companies are taken off the job it would mean that T Co would miss it contractual deadline of Contract X by one week. As a result T Co would have to pay a one-off penalty of $5000. Since there is no other work for scheduled for their engineers in one week’s time it will not be a problem for them to complete Contract X at this point
i am calculating the lost contribution from contract X
sorry sir, but the question does not state the “engineer hours”
i think i had made a mistake by comparing it ,
if the question didnt mention engineering hour
how do we compare both lost contibution and penalty to find the cheaper cost then?There is no lost contribution (and therefore we do not need to know the hours) because they will do the work anyway but in one weeks time when they have no other work scheduled.
Therefore the only extra cost is the penalty of $5,000 for doing the work late.The answer does explain this in Note 2.
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