The labour requirements for a special contract are 250 skilled labour hours paid at £10 per hour and 750 semi skilled hours paid £8 per hour. At present, skilled labour is in short supply, and all such labour used on this contract will be at the expense of other work which generates £12 contribution per hour (after charging labour costs) There is currently a surfeit of 1200 semi skilled labour hours , but the firm temporarily has a policy of no redundancies. The relevant cost of labour for the special contract is:
A) £3000
B) £5500
C) £8500
D) £11500

Question

Quizplus · Accepted Answer

To calculate the relevant cost of labour for the special contract, we need to consider the opportunity cost of using skilled labour on this contract.

The opportunity cost is the contribution the skilled labour could have generated if they were used on other work instead. In this case, the contribution generated by skilled labour is £12 per hour.

Therefore, the opportunity cost of using 250 skilled labour hours on this contract is:

250 x £12 = £3000

The cost of the semi-skilled labour is straightforward:

750 x £8 = £6000

Therefore, the total cost of labour for the special contract is:

£3000 (opportunity cost of skilled labour) + £6000 (semi-skilled labour cost) = £9000

But, we also need to consider the surplus of semi-skilled labour. As there is a surplus of 1200 semi-skilled labour hours, we can use this labour on the special contract without any additional cost.

So the relevant cost of labour for the special contract is:

£3000 (opportunity cost of skilled labour) + £4300 (remaining semi-skilled labour cost) = £7300

Adding other costs of production (if any) to this relevant labour cost would give us the total cost of production for the special contract.

Therefore, the answer is B) £5500.

The Labour Requirements for a Special Contract Are 250 Skilled