Relevant cost – Material K 

Since the material is regularly used by the company, the relevant cost of material K is the current price of the material. 

Cost last month =$19,600/ 2,000 kg = $9.80 

Revised cost (+5%) = $9.80 × 1.05 = $10.29 

∴ Relevant cost of Material K = 3,000 kg × $10.29 per kg = $30,870 

Relevant cost – Material L 

Since the material is not required for normal production, the relevant cost of this material is its net realisable value if it were sold. 

∴ Relevant cost of Material L = 200 kg × $11 per kg = $2,200 

Relevant cost – Skilled labour 

Skilled labour is in short supply and therefore the relevant cost of this labour will include both the actual cost and the opportunity cost of the labour employed. 

                                                                                                              $ 

Cost of skilled labour (800 hours × $9.50)                              7,600 

Opportunity cost of skilled labour (see working)                     8,000 

Relevant cost – skilled labour                                                   15,600 

Working 

Skilled labour cost per unit of Product P = $38 

Cost per skilled labour hour = $9.50 

∴ Number of hours required per unit of Product P =$38 / $9.50 = 4 hours 

Contribution per unit of Product P = $40 

∴ Contribution per skilled labour hour = $40/4 hours  = $10 per hour 

∴ Opportunity cost of skilled labour = 800 hours × $10 per hour  = $8,000

 The total relevant costs of this contract are therefore $(30,870 + 2,200 + 15,600) = $48,670