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Hello John, Thanks for the lectures.
In practice question 1, we were asked to calculate the relevant labour cost.
Why is the answer $11,000 instead of $6,000 since the workers would be paid $5,000 (ie 500 hours x $10/hour) irregardless of whether they work on the project or not (as the workforce is fully employed)?
Wouldn’t we need to add the $5,000 only if the question said workers were idle in which case we would not have paid that $5,000 but would now have to pay since they are working on the new project?
When labour is taken off a job, then the relevant cash flow is the lost contribution plus the labour cost. What you say is wrong, and we explain this in John’s fabulous Paper PM lectures.
If labour is taken off a job, then we lose the revenue from that work, and we save the variable costs from that work (except for the labour cost, which is paid anyway). Therefore the relevant cost is revenue less other variable costs, which is always the same as contribution plus labour.
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