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Hi there,
I have a question:
Company A needs to starts Project A and it needs 100 labour hours. The cost is $10 per hour. While, currently company A’s labours are working on other project (project B) and it is charging $15 per hour to the customer.
My question is “What is my relevant cost?”
It is $1,000 or $1,500? Since using own labours will give me opportunity cost of RM 1,500 for project A. Can hire other labours at $1,000 to minimize the cost and make it as my relevant costing?Thanks a lot.
The relevant cost is $1,500.
They will be paying the workers whatever happens, but if they do the project then they will be losing $15 per hour that they could otherwise be earning.
If the question says that they can hire other workers at a cost of a $1,000, then the relevant cost would become $1,000 because that would be cheaper than losing the $1,500 from the other work. (But you do not assume this – it is only relevant if the question says that other workers are available.)
Hi John
My approach to the above is slightly different and I just would like some clarity to ensure I am not missing the point (although I do come out to the same answer as you!).My calculation would be:
$10 x 100 hours required = $1,000
Lost contribution of other contract = $500 ($15 earned less $10 paid) = $5 x 100.I thought the calculation was for the contribution being lost by employing this labour – not the “sales” cost being lost.
Perhaps I’m just getting my wires crossed but it’s the way this relevant cost has become embedded in my grey matter! Can you please advise?
Kind Regards
Chris
It does not matter which way you approach it – what you are doing is fine 🙂
In general it is the labour cost per hour plus the lost contribution per hour.
Since in this question there are no other costs involved it is the same as the $15 per hour being charged.
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