Page 410 - PM Integrated Workbook 2018-19

Chapter 15

(3) The material is in stock and there are two options if this material is not
used for the contract:

Option 1 – Sell it for $6,000.

Option 2 – Use it as a substitute and save $8,000.

Option 2 is preferable. This is therefore the opportunity cost of using it in
the contract.

(4) The material is in stock and will not be replaced. The cost of disposing of
50 litres will be saved (@ $50/litre, i.e. $2,500). Saving this cost is a
relevant benefit.

(5) The incremental cost of paying for the labour needed.

(6) 1,500 spare hours have already been paid for as the workforce are on
annual contracts. The additional cash flow is therefore the extra 500
hours that are needed at time-and-a-half.

(7) For each hour diverted from their normal jobs contribution of $2 will be
foregone. This together with the cost of paying the workers to do the
project amounts to a relevant cost of $12 per kg. They would not be hired
at $20 per hour as this is more expensive.

(8) Fixed overheads can be ignored as they are not incremental.

(9) Costs of preparing the tender are all sunk costs and hence must be
ignored.

(10) Profit element should be ignored since a minimum contract price is being
calculated.

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