A contractor's annual overhead costs are $180,000 and annual direct costs are $720,000. What overhead percentage should be applied to future bids?
Correct Answer
C) 25%
Overhead percentage is calculated as overhead costs divided by direct costs: $180,000 ÷ $720,000 = 0.25 or 25%. This percentage is applied to direct costs in future bids to recover overhead expenses.
Why This Is the Correct Answer
The overhead percentage is calculated by dividing total overhead costs by total direct costs, then converting to a percentage. Using the formula: Overhead % = (Overhead Costs ÷ Direct Costs) × 100. This gives us ($180,000 ÷ $720,000) × 100 = 25%. This percentage represents how much overhead must be added to each dollar of direct costs to ensure all overhead expenses are recovered in future projects.
Why the Other Options Are Wrong
Option A: 30%
35% significantly overstates the required overhead percentage and would likely result in losing bids due to inflated pricing that doesn't reflect actual cost relationships.
Option B: 35%
30% is too high and would result in overcharging customers, making bids uncompetitive while generating excess overhead recovery beyond actual costs.
Option D: 20%
20% would result from incorrectly calculating the overhead percentage, possibly by using the wrong denominator or making an arithmetic error in the division.
Memory Technique
Remember 'Over Direct' - Overhead goes OVER Direct costs in the division formula. Think of overhead as the 'top' of a fraction with direct costs as the 'bottom'.
Reference Hint
Look up 'Overhead Calculations' or 'Job Costing' in construction business management chapters, typically found in contractor reference manuals under financial management sections.
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?