- March 2, 2018 at 6:56 pm
Hi. I have just attempted the questions available on this site for short-term decision making and one of the questions is as follows –
‘A company needs 5,000 hours of labour for a contract they have been asked to quote for. The work currently being carried out by our employees is generating a contribution of $12 per hour, and using them on the contract will mean taking them away from their other work. Our workers are paid at the rate of $8 per hour.
What is the relevant cost of the labour required for the contract?’
Answer options are –
Now to my understanding the answer would simply be the lost contribution from taking them away from their other work which would be 5,000 hours x $12 contribution = $60,000.
However, the answer is $100,000 and including the $8 per hour labour cost. Wouldn’t the labour cost be paid either way if the contract was taken on or not? Therefore, the labour cost is not incremental?
Not sure if my understanding is wrong or if the answer is wrong.
PLEASE ADVISE.March 3, 2018 at 10:12 am
In future you must ask in the Ask the Tutor Forum if you want me to answer – this forum is for students to help each other.
The answer is certainly not wrong!!
Have you not watched my free lectures on relevant costing? Because I explain this in the lectures (and it is a common question in the exam!!).
Suppose they are currently making a product that has a selling price of $100, labour cost of $10, and other variable costs (materials etc) of $20. They are therefore currently earning a contribution of $70.
Suppose the labour is taken to use on another job. They will still be paying the labour of $10. However they will lose the revenue of $100 but save the other variable costs of $20.
So the net loss by taking the labour is 100 – 20 = $80. The is always obviously the same as the lost contribution plus the labour: 70 + 10 = $80.
I do suggest that you watch the free lectures!March 3, 2018 at 11:46 am
I have already watched the free lectures on Relevant Costing and this is not stated, it is only stated that the wage for the salary supervisor is not relevant as it would be paid regardless.
Hence why I felt the same about this question because if they are not pulled off their work, they are still paid the $8 per hour either way.
I understand what you are saying regarding the labour now but it’s not made obvious in the lecture, I stopped the lectures at every point possible to write down my own notes and it is not in my notes regarding variable labour.
Thank you for the explanation.March 3, 2018 at 12:11 pm
It is exactly the same logic as the way that the overheads are dealt with, and explained, in the example I work through in the lecture 🙂
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