The following information pertains to Steel Wheels, Inc: What are the prime costs for the year?
A) $360,000
B) $480,000
C) $270,000
D) $300,000

Question

The following information pertains to Steel Wheels, Inc:  What are the prime costs for the year?
A) $360,000 
B) $480,000 
C) $270,000 
D) $300,000

Quizplus · Accepted Answer

Prime costs include direct materials and direct labor. The information given does not provide the breakdown between direct materials and direct labor, but it does provide the total cost of goods sold for the year ($1,200,000) and the gross profit percentage (40%). Using the formula Gross Profit = Sales - Cost of Goods Sold, we can determine that Steel Wheels, Inc had sales of ($1,200,000 / 0.6) = $2,000,000 for the year. Therefore, using the formula Prime Costs = Cost of Goods Sold - Gross Profit, we get Prime Costs = $1,200,000 - ($2,000,000 x 0.4) = $270,000.

The Following Information Pertains to Steel Wheels, Inc: What