A construction company has a project that started with a contract value of $500,000. To date, they have incurred costs of $300,000 and estimate $150,000 more to complete. What is the estimated gross profit on this project?
Correct Answer
A) $50,000
Total estimated costs = $300,000 (incurred) + $150,000 (to complete) = $450,000. Estimated gross profit = $500,000 (contract value) - $450,000 (total estimated costs) = $50,000.
Why This Is the Correct Answer
To calculate estimated gross profit, you must first determine the total estimated project costs by adding costs already incurred to the estimated costs to complete. Then subtract this total from the contract value. The calculation is: Total estimated costs = $300,000 + $150,000 = $450,000, then Gross profit = $500,000 - $450,000 = $50,000.
Why the Other Options Are Wrong
Option B: $300,000
This simply states the incurred costs to date ($300,000) as the profit, which makes no sense as it ignores both the contract value and remaining costs.
Option D: $200,000
This incorrectly uses only the estimated costs to complete ($150,000) as the gross profit, ignoring the costs already incurred. This would overstate the profit significantly.
Memory Technique
Remember 'CTC' - Contract minus Total Costs equals profit. Total costs always include both money spent AND money still needed.
Reference Hint
Look up project accounting and cost control sections in construction management references, particularly chapters on job costing and profit calculation.
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