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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.
Only the costs of raw materials and direct labor are used in the prime cost formula. In the above example, the raw materials are the lumber and hardware used for assembly. The total cost of raw materials is $5,000 + $1,500, or $6,500. The total cost of labor is $15 * 50, or $750. Prime Cost = Raw Materials + Direct Labor.