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Top has limited factory capacity measured in labour hours and a decision must be made whether to make or buy a product X. Supplies of X can be purchased for $12 per unit. If X is made each unit costs $5 in raw materials and requires 3 labour hours. Labour is paid at $1.5 per hr. LAbour is currently working to capacity making product Y which earns a contribution of $2/unit, each unit needing 5 labour hours.
In the answer to this question, the lost contribution of next best alternative used is $2 * 3/5= 1.2 but my question is if it is lost contribution shouldn’t it based on 2 hours and not 3?
Every hour taken from product Y is losing contribution of $2/5.
Therefore since each unit of X takes 3 hours, it is costing 3 x $2/5
But aren’t we losing 2 hours contribution and not 3?
and
Thank you for the reply.Given that making X takes 3 hours, then we are losing 3 hours from product Y’s production and therefore 3 hours of contribution.
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