MArelevant costing

Hello Alfo,

I have not yet been able to answer your last question " contribution of the limiting factor" since I'm still not yet on that chapter. However I have yet another problem maybe you or anyone else can help.

Why are the consultancy costs 2500 instead of 5500.
This what is given in the exercise:
"to complete the work the following costs would be incurred:
- Consultancy fees 4000. If the worked is not complete the consultancy's contract would be cancelled at a cost of 1500.
What is the relevant cost for this part?
For me the 4000 are etra costs so, they should be included. The way I understand the 1500 is like this....I do not understand it another way.
The company and the consultancy firm have themsellves drawn a contract and the terms and conditions of the cntract in brief say: If we (company) finish the work you (consultant) will have 4000. If we do not, however far into the project we find ourselves, you (consultant) will receive 1500 less.
It is really important to understand the logic, to figure out what would really happen between two companies working with eachother. I hopefully have the logic........ If you do come up with another logical answer that would contradict mine......please tell me. I cannot be sure enough!!!

Thanks

what about if there are 400 hours spare labour capacity. the remaining hours could be worked as overtime at time-and-a-half or labour can be diverted from the production of product X. product X currently earns a contribution of $4 in two labour hours and direct labour is currently paid at a rate of $12 per normal hour.
what is the relevant cost of labour for the contract?

Hi rouquinblanc
Don't forget that relevant cost are that cost that come directly from a decision.
In this case I understood that
1) if I take the project I ll pay 4000 € of consultancy fee
2) if I don't take the project I ll pay 1500 € (like a fine for leaving the contract)
So I think you should watch the thing as a company
(you are not the consultant ! We are talking about costs that firms pay)
WHAT IS RELEVANT ?
Eeither if I take or refuse the project I will pay at least 1500 (this 1500 are not relevant then)
If I take the project I ll pay 4000.
The decision to take the project will increase the costs of 2500.
I hope I was clear. Anyway the things are alternatives: cannot be 4000+1500.
****
Sabreen
It looks like the text of the esercise is not complete. How many hours are required in total?
However what are the relevant costs?
- for the first 400 hours = zero. There is spare capacity (people paid/doing nothing)
- for the remaining hours :
a) over time = relevant cost is 12*1.5 = 18 /hour
b) take workers from process X = 12 + 4 = 16/hour
you pay the workers and also lose the contribution of prod.X
Let me know the answer for this one.
bye