Consider two products in the same product area: Sales price (per unit) Direct material cost Direct...

Consider two products in the same product area:

Sales price (per unit) Direct material cost Direct labor cost

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 in 2009 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 forward but please explain your answer

Expert Solution

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 x 100)	22%	4%	5%	-17%
Product 1 is more profitable both in relative terms and absolute terms
Note:
	Overhead Allocation Rate =	Direct Cost	x 100
	Indirect Cost

ekkarill92 answered 2 years ago

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