PREMIER PRODUCTS, INC. - SOLUTION
TABLE A PRODUCT | A | B | C | D | Total | Units produced | 1,000 | 1,000 | 1,000 | 1,000 | | Material | $15.00 | $ 5.00 | $10.00 | $ 5.00 | | + Labor | 30.00 | 5.00 | 15.00 | 10.00 | | +Variable OH | 15.00 | 7.50 | 5.00 | 7.50 | | = Total var. cost | $60.00 | $17.50 | $30.00 | $22.50 | | + Fixed overhead | $10,000 | $10,000 | $12,500 | $12,500 | | = Unit cost | $70.00 | $27.50 | $42.50 | $35.00 | | Selling price | $98.00 | $38.50 | $59.50 | $49.00 | | Unit Profit | $28.00 | $11.00 | $17.00 | $14.00 | | Mark-on | 40% | 40% | 40% | 40% | | Total Profit | $28,000 | $11,000 | $17,000 | $14,000 | $70,000 |

The overhead rate for the year is determined by adding together the budgeted variable and fixed overhead costs and dividing this sum by the number of budgeted labor hours. The standard cost of a product is found by multiplying the number of direct labor hours required to manufacture that product by the overhead rate and adding this quantity to the direct labor and material costs.
Under this allocation method the allocation rate is: Budgeted variable overhead | $35,000 | Budgeted fixed overhead | 45,000 | Budgeted total overhead costs | $80,000 | Budgeted labor hours | 12,000 | Allocation rate per hour | $6.67 |

Arnold then calculated the mark-on for the four products using the standard cost for each product based on allocating the overhead costs using direct labor hours.

PRODUCT | A | B | C | D | Selling price | $98.00 | $38.50 | $59.50 | $49.00 | Unit cost | $85.00 | $16.67 | $45.00 | $28.33 | Profit | $13.00 | $21.83 | $14.50 | $20.67 | Mark-on percentage | 15% | 131% | 32% | 73% |

QUESTION 1
1. If Premier maintains its rule about dropping products with a mark-on below 25%, which additional products, if any, will it drop? Variable