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A contract requires 100 hours of skilled labour.
Labour is paid at $5 per hour.
Labour is currently fully occupied making another product which is generating a contribution of $8 per unit.
Each unit of the other product requires 2 hours of skilled labour.
What is the relevant cost for labour?
Please don’t just set me a test! Presumably you have the answer in the same book that you found the question 🙂
The relevant cost per hour is the labour cost of $5, plus the lost contribution per hour which is $8/2 = $4. So the total is $9 per hour.
For 100 hours, this means that the relevant cost is $900.
If you need more explanation then you should watch the free lectures on relevant costing.
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