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relevant cost of labor

FFatima2y ago
Question) A new project by BLW company would require 1000 hours of skilled labor. The current work force is already fully employed but more workers can be hired in at a cost of $20 per hour. The current workers are paid $ 15 per hour on a project that earns a contribution of $ 10 per hour. What is the relevant cost of appraisal to be included in the project appraisal? Solution Option 1 Buy in new workers $ 20 / hr * 1000 labor hours = 20000$ Option 2 Divert existing labor ($ 10 + $ 15 / hr * 1000 labor hours = 25000 $) Option 1 is the cheapest so that is relevant. Query: For option 2, if we divert existing labor, we lose contribution of $ 10 per house so that is relevant. But we no longer have to pay $ 15 / hour because the existing project is probably discontinued to focus on new project. So should we not take this as a cash inflow ( avoidance of an outflow) ? it should be (10*1000) - (15*1000) = -5000$ benefit
IAW3005IAW3005Tutor2y ago#1
We still have to pay for the labour so its the $15 ph normal rate (whether they work on this one or the previous project they still have to be paid per hour) plus op cost of $10.
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