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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?-The answer is $2,500
-In the answer it says: ” Labour is in short supply so there is an opportunity cost. The contribution from Contract Z will still be earned but will be delayed. The relevant cost is therefore the wages earned plus the penalty fee.-My issue is that how Contract Z will still be earned the contribution. The workers are working at full capacity therefore if they work for the special contract, then it should be obvious that there would be a lost in contribution. Therefore, meaning that should
the relevant cost therefore be the wages earned plus the penalty fee + the lost contribution.
-Could you please clarify that?Thanks.
The contribution is only relevant if they are actually losing contribution which will only be the case if Z is not produced at all.
Here they still will do contract Z – it will just be delayed – and therefore they will not lose any contribution, but instead will just have the cost of the penalty.I have got your point here.
But in the question, it says that workers are working at full capacity which means they are working all the time available. Therefore, how they would compensate for that loss contribution?
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