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if I divert employees currently paid a $7 per hour rate to a one off project, and I know that there is a loss of contribution of $3 per hour and the project requires 600 hours, what is the relevant cash flow?
It is also stated that production of the current product will stop while the staff is at the new project.
I thought it would be the lost contribution only i.e 600*3. ISnt the 7*600 incurred anyways? since production is stopped ? Do you understand where I am confused here? I mean if production of the current product would still take place then yes I would have an extra 600*$7 no?
Thank is Advance,
Loukas
The relevant cost is the lost contribution plus the labour.
Suppose the other product took 1 hour to make, had a selling price of 12, had labour cost of 3, and other variable costs (including materials) of 2. Then the contribution is 7.
If we take away that hour and so cannot make the product, we lose the revenue of 12, we save the other variable costs of 2 (but we still pay the labour). So we lose a net 10, which is always the same as the contribution (7) plus the labour (3).
It is exactly the same principle as what I explain with regard to the machine overheads in my free lectures on relevant costing.
thank you very much for your reply, i did relevant costing before with you in F9 and had found it so easy I do not know why I get so stuck in F5
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