Question

Susan Delaney analyzes product profitability of one of her clients using the following data:

	2013	2014	2015
Overhead costs	110,000	120,000	100,000
Direct labor	25,000	30,000	20,000

She is particularly interested in profitability of Product 1, which had its sales price and costs per unit unchanged during these years at:

	Product 1
Sales price (per unit)	113
Direct material cost	18
Direct labor cost	5

For financial reporting purposes, overhead is allocated to products based on direct labor costs using actual overhead rates that vary from year to year. The net operating profit margin is defined as sales minus full product costs (labor, material, and allocated overhead costs). What was the net operating profit margin of Product 1 in 2015?

Enter your answer as a number rounded to two decimal points, e.g., 3.14, 25.70, 100.00, 1540.99. Do not enter any letters, unit symbols (such as %), commas, or other non-numerical characters!

Answer 1

Direct labor cost in 2015 = 20,000

Overhead costs in 2015 = 100,000

overhead is allocated to products based on direct labor costs

Overhead allocation rate = Overhead costs in 2015/Direct labor cost in 2015

= 100,000/20,000

= 500%

	Product 1
Sales price (per unit)	113
Direct material cost	- 18
Direct labor cost	- 5
Overhead (5 x 500%)	- 25
net operating profit margin	65

net operating profit margin =  net operating profit/sales price

= 65/113

= 57.52

Kindly give a positive rating if you are satisfied with the answer. Feel free to ask if you have any doubt. Thanks.