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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?
A $1,000
B $1,500
C $2,500
D $7,500the correct answer is C but it does not make sense to me.Why the lost contribution is not taken into calculation ?The examiner saying the project will be delayed but the contribution will still be earned.How it will still be earned because the labour is in short supply ?Also if he means that later it will be earned when the labour will be free so that should apply to every other question as well where we calculate lost contribution and add it into relevant costs?
The contribution will still be earned because the question specifically says that Z will be delayed (so presumably labour will be available later).
It does not apply to other questions, because you cannot assume that labour will be available later and therefore the project can simply be delayed, unless the question specifically says so.
The examiner included the paragraph about the contract being delayed for a reason, and the wording makes the position perfectly clear.
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