A contractor is preparing a bid for a project with the following costs: Direct Labor $150,000, Materials $200,000, Equipment $50,000, Overhead 18%, and desired profit margin 12%. What should the total bid amount be?
Correct Answer
C) $580,800
Direct costs = $150,000 + $200,000 + $50,000 = $400,000. With 18% overhead: $400,000 × 1.18 = $472,000. With 12% profit on total: $472,000 × 1.12 = $528,640. However, profit should be calculated on the base amount, so total bid = $400,000 × 1.18 × 1.12 = $580,800.
Why This Is the Correct Answer
Option C is correct because the total bid calculation follows the proper sequence: first calculate direct costs ($400,000), then add overhead (18% = $72,000), then add profit margin (12% of the subtotal). The calculation is $400,000 × 1.18 × 1.12 = $580,800. This method ensures both overhead and profit are properly applied to create a comprehensive bid that covers all costs and desired profit.
Why the Other Options Are Wrong
Option A: $520,000
$520,000 appears to only add a flat 30% to direct costs ($400,000 × 1.30), which incorrectly combines overhead and profit as simple additions rather than calculating them sequentially.
Option B: $544,000
$544,000 results from adding overhead first ($472,000) but then adding an insufficient profit margin, likely calculating profit incorrectly or using the wrong base amount.
Option D: $592,000
$592,000 is too high and likely results from incorrectly calculating profit on top of overhead plus direct costs, or applying percentages in the wrong order or to wrong base amounts.
Memory Technique
Remember 'DOP' - Direct costs first, then Overhead, then Profit. Think 'layer cake' - each percentage builds on the layer below it, not just the bottom layer.
Reference Hint
Florida Building Construction Standards - Chapter on Cost Estimating and Bidding Procedures, or Business and Finance Law section covering contractor markup calculations
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