Example of Contribution as Relevant Cost

Example of Contribution as Relevant Cost

Item	Hour	Rate
Labour (Scare)	4000	10
Variable overhead	5000	5
Fixed overhead			8000

Labour hour can be use another job which will earn a contribution of 8 per unit. Whether Alam & company should select the job at a price 100,000.

Solution

item	Hour	Rate	Amount	Total
Price offered				100,000
Labour	4000	10	40,000
Variable overheads	5000	5	25,000
Fixed Cost	Not relevant
Contribution	2000	8	16,000
Total Cost			81,000	(81,000)
Profit				19,000

Important points

1.       Fixed cost is irrelevant cost

2.       Labour overheads and variable overheads are relevant cost because contribution is calculated after deducting the labour and variable cost otherwise contribution would be much higher and would be required to add the higher contribution as opportunity cost.

The job should be opted because it will bring additional contribution of 19,000 as calculated above.