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 B: $544,000
$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 D: $592,000
$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.
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
More Business & Finance Questions
A general contractor purchases equipment worth $45,000 with a useful life of 9 years and no salvage value. Using straight-line depreciation, what is the annual depreciation expense?
What is the typical recommended coverage amount for general liability insurance for a small to medium-sized general contracting business?
A contractor estimates startup costs of $75,000 for equipment, $25,000 for initial inventory, $15,000 for insurance premiums, and $10,000 for working capital. They can finance 70% of the total. How much cash do they need?
When establishing professional relationships with architects and engineers, what is the most important factor for a general contractor to consider?
A partnership agreement for a construction company should address all of the following EXCEPT:
A contractor purchases a truck for $60,000. After 5 years, it has accumulated depreciation of $35,000. What is the truck's book value?
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?
Using the Modified Accelerated Cost Recovery System (MACRS), construction equipment is typically depreciated over how many years?
A contractor is comparing financing options for equipment purchase. Option A: $80,000 cash purchase. Option B: $20,000 down, $65,000 financed at 6% for 4 years. What is the total cost of Option B?
A contractor purchases equipment using a capital lease with a present value of $120,000. How should this be recorded on the balance sheet?
People Also Study
Related Study Resources
Previous Question
A contractor is tracking costs for a commercial project with a contract value of $500,000. To date, costs incurred are $320,000 and the project is estimated to be 70% complete. What is the projected total cost at completion using the percent complete method?
Next Question
A critical path activity is delayed by 3 days due to material delivery issues. How does this affect the overall project completion?