A construction company completed a project with the following costs: Materials $85,000, Labor $65,000, Equipment rental $15,000, Overhead allocation $22,000. The contract price was $225,000. What is the gross profit margin?
Correct Answer
B) 16.8%
Total costs = $85,000 + $65,000 + $15,000 + $22,000 = $187,000. Gross profit = $225,000 - $187,000 = $38,000. Gross profit margin = $38,000 ÷ $225,000 = 16.8%.
Why This Is the Correct Answer
Option A is correct because gross profit margin is calculated by dividing gross profit by total revenue (contract price). First, we sum all project costs: materials ($85,000) + labor ($65,000) + equipment rental ($15,000) + overhead allocation ($22,000) = $187,000 total costs. Then we subtract total costs from contract price to get gross profit: $225,000 - $187,000 = $38,000. Finally, we divide gross profit by contract price: $38,000 ÷ $225,000 = 0.168 or 16.8%.
Why the Other Options Are Wrong
Option A: 20.2%
This percentage would result from an incorrect calculation, possibly dividing gross profit by total costs instead of contract price ($38,000 ÷ $187,000 = 20.3%), or making an error in cost summation.
Option C: 25.6%
This percentage is too low and could result from calculation errors such as using the wrong denominator or incorrectly adding costs together.
Option D: 12.4%
This percentage is too high and likely results from excluding one or more cost categories when calculating total project costs, leading to an inflated gross profit figure.
Memory Technique
Remember 'MLEO' for cost categories: Materials, Labor, Equipment, Overhead. For margin formula, think 'Profit over Price' - always divide by the selling price (contract price), not costs.
Reference Hint
Look up 'Financial Management' or 'Cost Accounting' chapters in your contractor reference manual, specifically sections on profit margin calculations and project cost analysis.
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