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In one of the questions of the mock while calculating revelant cost ,contribution of $4 per hour was being added in the hourly rate of $7. Further information about overtime was given at $10 per hourbut the workers were against working overtime. The new order was to be made immediately and it would take 10 hours of work. I wanna know why was the contribution added in the hourly rate?
Let me explain by making up a little example.
Suppose they are currently making a product that has revenue of $20, labour cost of $4, and material cost of $5. So they are making a contribution of $11.
If the labour is taken away to make another product, then they will lose the revenue of $20, but they will save the material of $5. (The labour will still be paid).
Therefore the net amount lost (so the relevant cost) is 20 – 5 = $15.
This is always equal to the contribution plus the labour (11 + 4 = $15).
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