A contractor's business plan projects first-year revenue of $850,000 with a gross profit margin of 22%. What is the projected gross profit?
Correct Answer
B) $187,000
Gross profit = Revenue × Gross profit margin = $850,000 × 0.22 = $187,000. This represents the amount left after subtracting direct costs from revenue.
Why This Is the Correct Answer
Option B is correct because gross profit is calculated by multiplying total revenue by the gross profit margin percentage. The calculation is straightforward: $850,000 × 22% (or 0.22) = $187,000. This represents the money remaining after subtracting the cost of goods sold (direct costs like materials and labor) from total revenue, which is a key financial metric for contractor business planning.
Why the Other Options Are Wrong
Option A: $195,000
$165,000 would result from incorrectly calculating $850,000 × 0.194 (19.4%), which is not the given gross profit margin of 22%.
Option C: $203,000
$195,000 would result from incorrectly calculating $850,000 × 0.229 (22.9%), which exceeds the stated 22% gross profit margin.
Option D: $165,000
$203,000 would result from incorrectly calculating $850,000 × 0.239 (23.9%), which is significantly higher than the given 22% margin.
Memory Technique
Remember 'Revenue × Rate = Result' - multiply the Revenue by the profit Rate to get the profit Result (gross profit)
Reference Hint
Business and Finance for Contractors chapter on Financial Statements and Profit Calculations, or Construction Business Management section on Gross Profit Analysis
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