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QUESTION: A company is considering accepting a one-year contract which will require four skilled employees. The four skilled employees could be recruited on a one-year contract at a cost of $40,000 per employee. The employees would be supervised by an exisiting manager who earns $60,000 per annum. It is expected that supervision of the contract would take 10% of the manager’s time.
Instead of recruiting new employees the company could retrain some existing employees who currently earn $30,000 per year. The training cost would be $15,000 in total. If these employees were used they would need to be replaced a total cost of $100,000.
MY ANSWER:
$40,000 * 4 employees = $160,000
Training cost = $15,000
Replacement cost = $100,000
Total relevant cost = $275,000TEXTBOOK ANSWER: $115,000
Why are the potential salaries of the new employees not included in relevant cost? Thanks!
It is because they have the choice.
The can either recruit 4 new employees which would cost them $160,000.
Or alternatively, they can retrain the existing employees and also replace them in their current work. This would cost 15,000 + 100,000 = 115,000They will do whichever of the two alternatives is the cheaper, which is the second one at a cost of $115,000.
(This question is actually not likely these days in Paper F2. It is now more examinable in Paper F5)
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