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Question
40 hours of skilled labour are needed for a special contract. Skilled labour is scarce and would have to be taken off production of a different product in order to work on the special contract. The details of the other product are shown below:
$
Sales Price 120
Direct materials (@ $3/kg) 18
Skilled labour (@ $40/hr) 20
Variable overheads (@$4/hr) 2
Fixed overheads 20The skilled workers’ pay rate would not change, regardless of which product they worked on.
What cost for skilled labour should be included when pricing up the special contract?
Answer
I understand that because the labour is scarce there is an opportunity cost so the relevant costs will be the contribution forgone + diirect labour costs.
Contribution per hour = 120-18-20-2
= 80
(The answer calculates contribution per an hour and divides 80 by 0.5 to get= 160) I am not sure why.Direct labour costs= it costs $40 per hour
Total relevant costs= contribution per hour + direct labour cost per hour
=80+40
=120
there are a total of 40 hours.
therefore 120 *40 = 4800Please can you help.
the answer is $8000.
Because the skilled labour per unit is $40 per hour, and the layout cost per unit is $20 per hour, it means that each unit must take 0.5 hours.
Therefore since the contribution per unit is $80, but each unit only takes 0.5 hours, the contribution per hour = 80 / 0.5 = $160.
So the relevant cost = (160 + 40) x 40 = $8,000
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