Question

A company’s operations are limited by the number of direct labor hours available in a given period. Currently, the company pays each of its direct laborers at an average rate of $12 per hour. The company has identified a group of temporary laborers available for hire. Each temporary laborer will be paid at an average rate of $15 per hour.

Please describe two factors that the company should consider when deciding whether to hire the temporary laborers. One factor should be quantitative and one factor should be qualitative.

Answer 1

Solution:

Direct labor cost per hour for regular labor = $12 per hour

Direct labor cost per hour for temporary laboreres = $15 per hour

Excess cost per hour for temporary laboreres = $15- $12 = $3 per hour

If company's contribution margin per direct labor hours is greater than $3 per hour than company consider hire of temporary labor as it will result in higher income to the company over its incremental cost of temporary laborers.

Further company should consider qualitative factors like efficiency of temporary laborers, expereince in the job, training required, quality of work before deciding hiring the temporary laboers.