A contractor needs to determine the break-even point for a project. Fixed costs are $85,000, variable costs are 65% of revenue, and the contract value is $500,000. At what revenue level will the project break even?
Correct Answer
C) $242,857
Break-even revenue = Fixed costs ÷ (1 - Variable cost ratio). $85,000 ÷ (1 - 0.65) = $85,000 ÷ 0.35 = $242,857. At this revenue level, contribution margin equals fixed costs.
Why This Is the Correct Answer
Option B is correct because the break-even formula requires dividing fixed costs by the contribution margin ratio (1 - variable cost ratio). With fixed costs of $85,000 and variable costs at 65% of revenue, the contribution margin ratio is 35% (100% - 65%). Dividing $85,000 by 0.35 gives $242,857, which is the revenue level where total costs equal total revenue. At this point, the contribution margin of $85,000 (35% of $242,857) exactly covers the fixed costs.
Why the Other Options Are Wrong
Option A: $325,000
$325,000 is incorrect and doesn't follow the break-even formula. This amount would generate a contribution margin of $113,750, which exceeds the fixed costs and represents a profit situation rather than break-even.
Option B: $130,769
$500,000 represents the total contract value, not the break-even point. At this revenue level, the project would generate significant profit since the contribution margin would be $175,000, far exceeding the $85,000 in fixed costs.
Memory Technique
Remember 'FVCM' - Fixed costs divided by (1 minus Variable Cost ratio) equals break-even. Think 'Find Victory, Cover Margin' to remember you need contribution margin to cover fixed costs.
Reference Hint
Construction Business Management texts, Chapter on Financial Analysis and Cost Control, or Project Management sections covering break-even analysis
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