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HI
I have please a question regarding the relevant cost in connection with labour hours I understand that the Opportunity cost is the lost contribution if we take the team to work on the one off assignement rather han to keep it in the original production. But why we need to add the labour cost to find the relevant cost? This amount will be paid in all cases whether we use them for the assignement or keep them in original production.To be more specific:
The contract requires 800 hours of skilled labour. Skilled labour is paid $9.50 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 lost contribution in product P is 8,000 USD.
why the relevant cost is 8000+800*9,5USD and not only 8000 USD ( opportuinity cost?) many thanksLet me explain with a simple example.
Suppose labour is currently use making a product that has a selling price of $100, material cost of $30, and labour cost of $50. So a contribution of $20.
If the labour is taken for a new contract (so is no longer making the existing product) then they lose the revenue of $100 and save the material of $30. (They will still be having to pay for the labour). So the net amount lost is $70. This is the same (and is always the same) as the contribution of $20 plus the labour cost of $50.
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