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Hi Mr Moffat
Really grateful for your lectures on PM.
I have a question regarding the quiz of chapter 9. Its question number 5 where labour cost is added in the answer. I understood why contribution is added since it is the opportunity cost however i am not sure why labour cost is added?Can you please kindly explain?
Many thanks.
Consider this:
Suppose labour is currently being used to make a product that has a selling price of $20, labour cost of $4, and other variable costs (materials etc) of $3. So a contribution of $13.
If the labour is taken for a new project, then they lose the revenue of $20 but they save the other variable costs of $3. (The labour will still have to be paid).
So the net loss is 20 – 3 = $17, and this is the relevant cost.
This is the same (and is always the same) as the contribution (13) plus the labour (4).
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