CAF-5 · Chapter 18 · Question 5 of 20
(Relevant Costing & Labour Shortage) A special order requires 500 hours of skilled labour. The workforce is currently operating at full capacity. To execute this order, workers must be diverted from normal production where they earn a contribution margin of Rs. 60 per hour. The standard wage rate is Rs. 150 per hour. Alternatively, the company can hire temporary workers at Rs. 180 per hour, but they will require an existing supervisor to spend 50 hours overseeing them. The supervisor is paid Rs. 250 per hour and has spare capacity. What is the lowest relevant cost of labour for this special order?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Rs. 90,000
Explanation
Option 1 (Divert): CM lost + Wages = (60+150)*500 = Rs. 105,000. Option 2 (Temp): Temp wages = 500*180 = Rs. 90,000. The supervisor's cost is sunk as they have spare capacity. Lowest cost = Rs. 90,000.
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