A contractor's business plan projects first-year revenue of $500,000 with a 15% net profit margin. If actual revenue is $450,000 with the same profit margin, what is the variance in net profit?
Correct Answer
A) $7,500 below projection
Projected profit: $500,000 × 15% = $75,000. Actual profit: $450,000 × 15% = $67,500. Variance: $75,000 - $67,500 = $7,500 below projection.
Why This Is the Correct Answer
The correct answer is A because variance analysis requires calculating the difference between projected and actual profits, not revenues. The projected net profit was $75,000 ($500,000 × 15%) while the actual net profit was $67,500 ($450,000 × 15%). The variance is $7,500 below projection since actual profit fell short of the projected amount.
Why the Other Options Are Wrong
Option B: $7,500 above projection
Option B is wrong because it shows the variance as above projection, but the actual profit ($67,500) was less than the projected profit ($75,000), making it below projection, not above.
Option C: $50,000 below projection
Option C is wrong because it uses the revenue variance ($50,000) instead of the profit variance. While revenue was $50,000 below projection, the question asks specifically for the variance in net profit, which is only $7,500.
Option D: $67,500 below projection
Option D is wrong because $67,500 represents the actual profit amount, not the variance. The variance is the difference between projected and actual profits, which is $7,500, not the actual profit figure itself.
Memory Technique
Remember 'PVA': Projected minus Actual equals Variance. If the result is positive, actual is below projection; if negative, actual is above projection.
Reference Hint
Business and Finance chapter covering financial analysis, profit margins, and variance analysis
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