Page 232 - P1 Integrated Workbook STUDENT 2018

Chapter 12

 4,000 hours of skilled labour. Skilled labour is paid a fixed weekly wage
and there is currently spare capacity sufficient to provide half the
required hours. The remaining hours would be made up through overtime
which would be paid at $12 per hour.

 3,000 hours of semi-skilled labour. Semi-skilled labour is paid at $6 per
hour but is currently fully occupied on other projects. Due to union
restrictions, staff will not work overtime and there is no other labour
available at such short notice. Therefore the only way to get the required
hours is to move staff from other production. Each hour used on this
other production currently generates contribution of $4 per hour (being
revenue of $25, material cost of $15 and labour of $6).

 A machine bought for $30,000 four years ago. The machine is currently
being used elsewhere in the business where it generates a present value
of $20,000; it has a scrap value of $12,000. A similar replacement
machine could be purchased for $15,000 and would have a zero residual
value after the conversion project.

 The project will take place in a factory which is currently empty. The
factory is being depreciated and depreciation for the duration of the
project will be £10,000.

 The conversion project will be allocated a share of central overheads
calculated at a rate of £4 per skilled labour hour worked.

In making a decision on whether to convert the product, determine the
relevant cost of the following:

 the consultants fee

 the depreciation charge

 the machine

 the central overheads.

Solution

Consultant’s fee

This is an example of a committed cost. It cannot be avoided whether the
project goes ahead or not. It is therefore not relevant to the decision on
whether to convert or not. The relevant cost is $0.

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