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VV Company has been asked to quote for a special contract. The contract requires
100 hours of labour. However, the labourers, who are each paid $15 per hour, are working
at full capacity.There is a shortage of labour in the market. The labour required to undertake this special
contract would have to be taken from another contract, Z, which currently utilises
500 hours of labour and generates $5,000 worth of contribution.If the labour was taken from contract Z, then the whole of contract Z would have to be
delayed, and such delay would invoke a penalty fee of $1,000.
What is the relevant cost of the labour for the special contract?Question- Sir although i understood that 1000 would be a relevant Cost but why will (15* 100) would also be a relevant Cost?
Because any how labour was to be paid $ 15/per hour. Even if they were just sitting idle
However, the labourers, who are each paid $15 per hour, are working at full capacity. There is a shortage of labour, so if they are used on the special contract then that will be the 100 hours of labour at $15 as well? It’s an opportunity cost…….
Sorry Sir. But i couldn’t understood.
We haven’t lost the contribution from the contract even even we are shifting the labours from the contract Z.So whether they work on Z or work on this special contract, won’t it be the same.
This question will not mean losing contract Z , but will just mean delaying contract Z.
Therefore we will still get the contribution from Z, but we will have to pay for more labour (because they will be working on Z and on the special contract) and we will have to pay the penalty because Z will be delayed.
So the relevant cost is (100 x $15) + 1,000.Sir does it mean that. Since the labour are paid on $/ hr basis, so once done with the special contract we will shift back to Contract Z and her the work done?.
So the 100 hrs that time are the incremental cost?
Sir don’t take me wrong. I just want to clarify that, workers are already operating at full capacity, so if they perform the special contract and then shift back to Contract Z.
Provided there is already full capacity, would they be doing the work on Z during hours other than the normal working hours? Such as an Overtime.
Since, we have been not provided any info about Overtime Premium we have just taken the Normal Pay Rate.
They are not working overtime. They simply work on the new contract and then do the work they were going to have done later when they do have the time available.
Sir if they are doing that when the time is available, that means they would be performing the work during their idle capacity.
In that case that should not be a relevant Cost.
What idle time?
Does it not say….
However, the labourers, who are each paid $15 per hour, are working at full capacity.They are not idle, or working overtime for the contract
As explained already so many times….
They work on the new contract and then transfer back to their original work.
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