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Greetings respected sir, long time.
I needed your assistance in generous elaboration of the concepts of relevant costing, in order to clarify my doubts.Ennerdale
134) If the skill labour is in short supply, then that means additional laborers would not be procured for relevant cost to be generated. The salary is a committed cost – whether you use their 800hrs in the contract or on production, the payment is going to remain the same (800hrs x $9.5). So why do we consider this as a relevant cost, besides lost contribution, the latter of which could be understandable- as something is indeed being lost and changed from the balance of the equation.T CO
152) Although the work can resume after a week by paying a fine of $500, are we not missing the contribution for the week being missed ? ($200 x 2 workers = $400) ? Shouldn’t thus this be added as lost contribution, alongside the fine being incurred.Also note, like Q.134, here also the staff is in short supply, and therefore their salaries are not being added into the equation because no additional person will be hired. So my complaint was: there should be consistency between the flow of solution for Q.134 and 152. And Im here to find out where I have gone wrong in my flow 🙂
Thanks.
Ennerdale:
Given that labour is currently fully employed, and each unit of P takes 4 hours to make, then for every 4 hours taken for the new contract they would lose production of 1 unit of P.
Losing one unit of P would mean that they would lose revenue of 100 but they would save ‘other variable costs’ of 22 (they would not obviously save on labour because they would still be paying that). So they would lose 100 – 22 = $78. This is (and always would be) the lost contribution of 40 plus the labour cost of 38.Therefore the relevant cost of labour is 78/4 = $19.50 per hour.
T Co.
They will not lose the contribution because the question says that they will be able to complete contract X later. So they will still get the contribution but they will have to pay the penalty for being late.
Because of what I have written with regard to both questions, there is no inconsistency between the questions.
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