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Prime Cost = Raw Materials + Direct Labor. The prime cost of a single bed frame is ($6,500 + $750) / 10, or $72.50. In order to generate a profit, the company must sell each frame for more than $72.50.
In this method both material cost as well as labour cost is the base for calculating the overhead absorption. It is calculated as (Overhead Cost/Prime cost)x 100. Prime cost is nothing but the sum of direct material cost and direct labour cost.