Page 401 - PM Integrated Workbook 2018-19

Answers

Example 4

100 hours of skilled labour are needed for a special contract. The staff are
working at full capacity at the moment and the workers 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:

$ per unit

Selling price 60
Direct material 10

Direct labour 1 hour @ $10/hour 10
Variable overheads 15

Fixed overheads 15

The skilled workers’ pay rate would not change, regardless of which
product they worked on.

What would be the relevant cost?

Existing product earns a contribution per hour of $60 – $10 – $10 – $15 =
$25

Relevant cost = Contribution forgone PLUS direct labour cost

= $25 + $10 = $35 per hour

Total cost = $35 × 100 hours = $3,500

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