If labor costs rise but other costs and revenue remain unchanged, what happens to prime cost?

• A. Increase
• B. Decrease
• C. Remain unchanged
• D. Become zero

Answer: (A)

Prime cost is the sum of direct materials and direct labor. If labor costs rise while direct materials, revenue, and other costs stay the same, the total prime cost must increase because the direct labor portion has increased the overall total. The other options would imply no change, a decrease, or nothing at all, which contradicts the fact that a component of prime cost has grown. In practical terms, higher labor costs without offsetting changes would squeeze profitability since prime cost takes up more of the revenue.