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A contract requires 800 hours of skilled labour.skilled labour is paid 9.5 per hour.There is a shortage of skilled labour and all the available skilled labour is fully employed in the company in the manufacture of product P.The following information relates to product P.
Selling price per unit=100
less:
Skilled labour per unit =38
Other Variable cost per unit=22Contribution per unit=40
What is the relevant labour cost that can be used as a quotation
Please do not simply set test questions and expect an answer! You must have an answer in the same book in which you found the question, and so you should ask about whatever it is in the answer that you do not understand – then I will help you.
When all about is currently employed, the relevant cost per hour is the lost contribution per hour plus the labour cost per hour.
Here, since the labour cost is $38 per unit, and labour is paid $9.50 per hour, the hours per unit are 38/9.5 = 4 hours.
Therefore the lost contribution per hour = 40/4 = $10.So the relevant cost is 10 + 9.50 = $19.50 per hour.
(Variable costs are also added, but only if they are charged on an hourly basis. Here they are not charge on an hourly basis and so they are not added.)
The logic of this is all explained in my free lectures on relevant costing. The lectures are a complete free course for Paper F5 and cover everything needed to be able to pass the exam well.
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