Final answer:
To determine the relevant cost for the refit contract, the opportunity cost of not producing canoes and the direct labor cost are combined. The calculation leads to a sum of £4,720, which includes the lost contribution from not selling 20 canoes, and the direct cost of the labour for the refit.
Step-by-step explanation:
To assess the viability of the refit contract, we must calculate the relevant cost by considering the opportunity cost of the skilled labor and the direct labor cost. Since skilled labor is taken away from producing canoes, we need to calculate the contribution margin lost from not producing those canoes. Each canoe requires 12 hours of skilled labor to make, sells for £200, and has a material cost of £60.
The contribution margin per canoe is the selling price (£200) minus the material cost (£60), which equals £140.
With 240 hours of skilled labor diverted from canoe production, that is 240 hours / 12 hours per canoe = 20 canoes not being made. The opportunity cost is the contribution margin per canoe multiplied by the number of canoes not produced which is £140 * 20 = £2,800.
Adding the direct labor cost: 240 hours * £8/hour = £1,920.
Therefore, the relevant cost for the refit contract is the sum of the direct labor cost and the opportunity cost: £1,920 + £2,800 = £4,720. However, as this number is not an option provided in the question, it seems there’s an assumption we need to clarify or an error