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Hi Mr. Moffat, can you help me with following:
Task: The installation is expected to take one week to complete and would require three engineers, each of whom is paid a monthly salary of $4000. The engineers have just had their annually renewable contract renewed with T co. One of the three engineers has spare capacity to complete the work, but the other two would have to be moved from contract X in order to complete this one. Contract X generates a contribution of $200 per engineer week. There are no other engineers available to continue with Contract X if these two engineers are taken off the job. It would mean that T Co would miss its contractual completion deadline on Contract X by one week. As a result, T co woud have to pay a one-off penalty of $500. Since there is no other work scheduled for their engineers in one week’s time, it will not be a problem for them to complete Contract X at this point.
What figure should be included in the relevant cost statement for engineer’s costs?
$500. Delaying the work on contract X would result in T Co missing the contractual completion deadline and having to pay a one-off penalty of $500.
Why we need to miss the contractual completion and pay after $500, if we can just have a lost contribution from 2 engineers ($200 each, so total lost contribution $400).
$400<$500. Am i wrong?
If they take the engineers off the job and never do contract X then they would indeed lose the contribution. However they would still have to pay the penalty as well because they would not be completing the contract on time.
It is cheaper to finish the contract a week late (and therefore not lose the contribution) and just pay the penalty.