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John Moffat.
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AverageAndy
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100 hours of unskilled labour, currently paid at $5.50 per hour, are needed for the contract. Z Co has no surplus capacity at the moment , but additional temporary staff could be hired at $6.50 per hour.
What is the relevant cost of the unskilled labour on the contract?
A $0
B $550
C $600
D $650Ans: D
Sir why is the answer not B because that is a cheaper option for the firm($550 vs $650). Here we dont have contrn lost amount so we can ignore that and assume that the company will choose the cheaper option which is the cost of shifting unskilled labour($550). So how is that wrong?
John Moffat
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They have two choices if they do contract Z. One is to hire temporary staff to do the contract and this would cost $6.50 per hour.
The other choices is to move current labour (in which case still be paying them $5.50), but if they do that then they will have to hire temporary staff to do the current work, and that will cost $6.50 an hour.
So in either case they will end up having to pay $6.50 an hour for the 100 hours needed.
Have you watched my free lectures on relevant costing? The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.
AverageAndy
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