A contractor is starting a new business and estimates the following startup costs: equipment $45,000, initial inventory $12,000, licensing fees $2,500, insurance premiums $8,000, and working capital needs $25,000. What are the total startup costs?
Correct Answer
B) $92,500
Total startup costs are the sum of all initial expenses: $45,000 + $12,000 + $2,500 + $8,000 + $25,000 = $92,500. All listed items are legitimate startup costs for a contracting business.
Why This Is the Correct Answer
Option B ($92,500) is correct because it represents the accurate sum of all five startup cost categories. The calculation involves adding equipment costs ($45,000), initial inventory ($12,000), licensing fees ($2,500), insurance premiums ($8,000), and working capital needs ($25,000). All these items are legitimate business startup expenses that a new contracting business would incur before beginning operations. This total provides the contractor with a complete picture of initial capital requirements.
Why the Other Options Are Wrong
Option A: $90,500
Option A ($90,500) is incorrect because it represents an arithmetic error, likely from miscalculating one or more of the expense categories, resulting in a total that is $2,000 less than the correct sum.
Option C: $87,500
Option C ($87,500) is incorrect because it significantly underestimates the total startup costs by $5,000, possibly from omitting one of the expense categories or making multiple calculation errors.
Option D: $95,000
Option D ($95,000) is incorrect because it overestimates the total startup costs by $2,500, likely from double-counting one of the expense categories or adding an incorrect amount.
Memory Technique
Remember 'EILIW' - Equipment, Inventory, Licensing, Insurance, Working capital - the five essential startup cost categories that every new contractor must budget for.
Reference Hint
Business and Finance chapter, specifically sections covering startup costs, business planning, and initial capital requirements for contracting businesses.
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