Question 5 Labour 5000 hrs existing labour rate is $8 p/hr Lost contribution is $12 I thought the Labour rate is not relevant but it turned out to be relevant as the correct answer was $100,000 not $60,000 Can you explain how please Thanks
Suppose labour is currently employed making a product that has revenue of $20, labour of $5, and other variable costs (materials and overheads) of $3. So the contribution is $12.
If we take the labour to another job, we lose the revenue of $20 and we save the ‘other variable costs’ of $3 (we will still be paying the labour). So the net loss (and the relevant cost) is 20 – 3 = $17.
This is always equal to the contribution + labour (12 + 5 = $17).