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A company is asked for a special contract the current labor is engaged in another project(at full capacity) who are each paid at $15/ labor hour and utilize 500 hours to produce a contribution of $5000 and labor is also short in market so we have to take the labor from our existing project.
Now if the labor is to be shifted from Current project for the special contract , existing project will be delayed and hence we will have to pay penalty of $1000.What is the relevant cost and why?
$1,000
The contribution from the other project will not be lost because all we will do is delay it, and so that is not relevant.
This assumes that the workers will be paid anyway and are therefore a fixed cost. If not, then there is the additional labour cost of $15 for however many hours they will work on the special contract (which is not given).
$1,000
The contribution from the other project will not be lost because all we will do is delay it, and so that is not relevant.
This assumes that the workers will be paid anyway and are therefore a fixed cost. If not, then there is the additional labour cost of $15 for however many hours they will work on the special contract (which is not given).
So Sir why can’t we account for the hours of special order as relevant cost by computing it on the basis of existing labor rate?
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