Section A - recommendations:
Section A consists of 15 MCQs (2 marks each)
Therefore, 30 marks are available in Section A
You should attempt all of the questions
Don't question spot
Section A questions aim to provide a broad coverage of the syllabus
Read the questions carefully
Tricky question 1:
How to get the correct answer:
The relevant cost of diverting labour away from existing production when the resource is being used at full capacity is the variable cost of a labour hour + opportunity cost.
The opportunity cost in this case would be the contribution of product P lost for every hour diverted away from its production.
As each unit of P takes one labour hour the opportunity cost per labour hour is $25 and the cost per labour hour must be $30 (from the cost card).
Therefore the relevant cost of labour is $55.
Note that the question asks for the total relevant cost of labour and variable overheads.
As these overheads are variable they are incurred when production happens and so are relevant and the variable overheads cost per hour is $20 (from the cost card).
The total relevant cost of labour and variable overheads is $75.
Selecting option A would have only recognised the lost contribution of product P.
Selecting option C ignored the opportunity cost element and included only the labour and variable overheads costs per hour.
Selection option D included the labour and variable overheads costs per hour but used the profit of $15 as the opportunity cost instead of contribution.