Consider two products in the s
January 18th, 2023
Consider two products in the same product area:
Sales price (per unit) Direct material cost Direct laborcost
Product 1 $62 $16 $14
Product 2 $78 $34 $12
Assuming the above unit price and costs remain unchanged,calculate the net operating profit margins of these products in2009 and 2010 using the overhead allocation method as in the case.Which of the two products is more profitable?
Overhead allocation rate 2009: .61 2010: .98\
I really need help understanding this. It seems straight forwardbut please explain your answer
Answer:
| Sl. No. | Particulars | Product 1 | Product 2 | ||
| 2009 | 2010 | 2009 | 2010 | ||
| a | Sale Price | $ 62.00 | $ 62.00 | $ 78.00 | $ 78.00 |
| b | Direct Material Cost | $ 16.00 | $ 16.00 | $ 34.00 | $ 34.00 |
| c | Direct Labor Cost | $ 14.00 | $ 14.00 | $ 12.00 | $ 12.00 |
| d | Total Direct Costs | $ 30.00 | $ 30.00 | $ 46.00 | $ 46.00 |
| e | Overhead Allocation Rate | 61% | 98% | 61% | 98% |
| f | ∴ Indirect Costs (d x e) | $ 18.30 | $ 29.40 | $ 28.06 | $ 45.08 |
| g | Net Operating Profit (a – d -f) | $ 13.70 | $ 2.60 | $ 3.94 | $ (13.08) |
| h | Net Operating Profit Margin (g/a x100) | 22% | 4% | 5% | -17% |
| Product 1 is more profitable both inrelative terms and absolute terms | |||||
| Note: | |||||
| Overhead AllocationRate = | Direct Cost | x 100 | |||
| Indirect Cost |
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