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hi john , for relevant costing why do we take the opportunity cost and include it as an allowance when caluclating the price for a contract? Like if labour is a scarce resource, we include the normal price as well as the oppourtunity cost? but why?
If labour is being taken from working on another product then the relevant cost is the contribution from that other product plus the labour cost. I do explain this and the reasons for it in the free lecture!!
If another product is ‘lost’ because of taking the labour, when we lose the revenue but save all the other variable costs apart from labour (because we are still paying for the labour). So the opportunity cost is selling price less other variable costs, which is exactly the same as the contribution plus the labour cost.
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