A contractor's business plan projects $500,000 in annual revenue with a 15% net profit margin. Fixed costs are estimated at $300,000 annually. What are the projected variable costs?
Correct Answer
B) $175,000
Net profit = Revenue - Fixed Costs - Variable Costs. With 15% profit margin: $75,000 profit = $500,000 - $300,000 - Variable Costs. Therefore, Variable Costs = $500,000 - $300,000 - $75,000 = $125,000.
Why This Is the Correct Answer
The calculation uses the fundamental profit equation: Net Profit = Revenue - Fixed Costs - Variable Costs. First, calculate the net profit: $500,000 × 15% = $75,000. Then rearrange the equation to solve for variable costs: Variable Costs = Revenue - Fixed Costs - Net Profit = $500,000 - $300,000 - $75,000 = $125,000. However, there appears to be an error in the provided explanation as it states the answer is B ($175,000) but shows a calculation resulting in $125,000 (option A).
Why the Other Options Are Wrong
Option A: $125,000
This would be the correct mathematical result ($125,000) based on the given formula, but conflicts with the stated correct answer
Option C: $225,000
This amount ($225,000) would result in a net profit of -$25,000, creating a loss rather than the projected 15% profit margin
Option D: $275,000
This amount ($275,000) would result in a net profit of -$75,000, creating a significant loss instead of the projected profit
Memory Technique
Remember 'RFV-P': Revenue minus Fixed costs minus Variable costs equals Profit. Rearrange as needed to solve for the unknown component.
Reference Hint
Business and Finance chapter covering profit/loss statements and cost accounting principles
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