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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
ThanksIt is easier if I make up some different figures.
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).
So the net loss is 20 – 3 =
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