ExpertMedium2 marksMultiple Choice
ACCA · Question 06 · Decision-making techniques
Section A
Apex Consulting is deciding whether to accept a special one-off contract. The contract requires 500 hours of highly skilled labor. Apex currently has spare capacity of 200 hours for this labor grade. The remaining 300 hours would need to be diverted from an existing project that generates a contribution of $40 per hour. The skilled labor is paid a fixed weekly salary, and no overtime is possible.
What is the relevant cost of labor for this special contract?
Section A
Apex Consulting is deciding whether to accept a special one-off contract. The contract requires 500 hours of highly skilled labor. Apex currently has spare capacity of 200 hours for this labor grade. The remaining 300 hours would need to be diverted from an existing project that generates a contribution of $40 per hour. The skilled labor is paid a fixed weekly salary, and no overtime is possible.
What is the relevant cost of labor for this special contract?
Answer options:
A.
$0
B.
$8,000
C.
$12,000
D.
$20,000
How to approach this question
Identify the relevant cost principles: fixed salaries are sunk/unavoidable. Spare capacity has a relevant cost of zero. Diverted capacity has a relevant cost equal to the lost contribution (opportunity cost).
Full Answer
C.$12,000✓ Correct
The labor is paid a fixed salary, so the basic pay is not a relevant cost (it will be paid regardless).
The 200 hours of spare capacity have a relevant cost of $0.
The 300 hours diverted from the existing project incur an opportunity cost of the lost contribution: 300 hours x $40 = $12,000.
Total relevant cost = $0 + $12,000 = $12,000.
Common mistakes
Including the fixed salary in the relevant cost, or applying the opportunity cost to all 500 hours.
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