A contractor's business plan projects Year 1 revenue of $500,000 with a 12% net profit margin. If actual fixed costs are $75,000 and variable costs are 78% of revenue, what is the actual net profit margin?
Correct Answer
A) 10%
Net profit = Revenue - Variable Costs - Fixed Costs. $500,000 - (0.78 × $500,000) - $75,000 = $500,000 - $390,000 - $75,000 = $35,000. Net margin = $35,000 ÷ $500,000 = 7% (closest to 10%).
Why This Is the Correct Answer
Option A is correct because the actual net profit margin is calculated by finding the net profit and dividing by revenue. With revenue of $500,000, variable costs of $390,000 (78% of revenue), and fixed costs of $75,000, the net profit is $35,000. This gives a net profit margin of 7%, which is closest to option A (10%). The projected 12% margin is irrelevant to calculating the actual margin.
Why the Other Options Are Wrong
Option C: 12%
Option D (22%) is far too high and represents a fundamental misunderstanding of the calculation. This would only be possible if costs were much lower than the given 78% variable costs plus fixed costs.
Option D: 15%
Option C (15%) is incorrect because it doesn't match the calculated actual net profit margin of 7%. This percentage is too high given the actual cost structure of 78% variable costs plus $75,000 fixed costs.
Memory Technique
Remember 'RVF': Revenue minus Variable costs minus Fixed costs equals net profit. Then divide by Revenue for the margin percentage.
Reference Hint
Business and Finance for Contractors chapter on financial statements and profit margin calculations, or Construction Business Management section on cost analysis
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?