relevant costs for NPV?

Labour shortages in the exam means "FULL CAPACITY" in the other process you refer to.

So the RC is the contribution forgone + the actual wages cost of the personnel transferred to work on the new project>

Regards, Kevin

But in the OT notes chapter 8 example 1 - the relevant cost of labour was taken to be the contribution excluding labour (i.e 150 - (100 - 40) where 150 is sales, 100 prime cost and 40 is wages)

Hi Liz,

I don't believe you have interpreted the OT solution correctly - as I have said in my previous post the RELEVANT COST is the contribution forgone + the actual wages cost of the personnel transferred to work on the new project.

Below, I have represented the solution in Chapter 8 - my answer is the SAME but take a look at how I have presented the actual LABOUR Cost:

Cost:Benefit analysis

Based on examination of the Relevant Cash Flows (Relevant Costs)

Schedule of Relevant Costs

Revenue 300,000

Less: Directly Attributable Costs

Materials (5,000)

Labour Cost
- Actual Wages 40,000
- Contribution Lost 50,000* 90,000

* Revenue 150,000 – Prime Cost 100,000 = Conribution lost of 50,000

Research Staff
- Actual Wages 60,000
- Severance Pay (35,000 – 15,000) 20,000

Equipment (8,000 – 6,000) 2,000

Rental – lost 7,000 174,000

Net Cash Flow (Inflow or Surplus) 126,000

Explanations for Managing Director:

Definition of Relevant Costs:
• Future C/F’s
• Incremental C/F’s
• Direct Revenues and Costs
• Opportunity Costs, etc., etc.,

Revenue
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Materials
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Labour
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
….. and so on for each line item in the question as above

I hope you get it now!

Regards, Kevin Kelly