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The relevant costs considered for diverting labour from one (existing) project to new project are: direct labour costs and opportunity cost according to BBP textbook.
I understand why opportunity cost is included… but why is direct labour cost taken into account. As direct labour cost would have incurred anyways on the existing project, if there was no new project…as in there is no extra cost for labour
Let me explain with a simple example.
Suppose labour is currently used making a product that has a selling price of $20 per unit, material cost of $8 per unit, and labour of $5 per unit (so a contribution of $7 per unit). Each unit takes 1 hour to produce.
If labour is taken for a new project, then for each hour taken we lose revenue of $20, we save materials of $8. The labour will still be being paid. Therefore we lose a net 20 – 8 = $12 for each hour taken, and this is the relevant cost.
This is the same (and is always the same) as the lost contribution of $7 plus the labour cost of $5.
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