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Sir Can you give an explaination as to why we add current labour cost as relevent cost. ? Reference to short question#5
Thanxs
Let me give you a simple example.
Suppose the units that they are currently making have a selling price of $20, labour of $5, and other variable cost (eg materials) of $3. So the contribution is $12.
Suppose the labour is taken away to use on another product. They will lose the revenue of $20. They will save the other variable costs of $3 (but they will obviously still be paying the labour).
So the net loss (the relevant cost) is $20 – $3 = $17.
This will always be the same as the contribution plus the labour ($12 + $5 = $17).
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