A contractor's financial projections show monthly fixed costs of $28,000 and variable costs of 68% of revenue. What monthly revenue is needed to break even?
Correct Answer
C) $87,500
Break-even revenue = Fixed costs ÷ (1 - Variable cost percentage) = $28,000 ÷ (1 - 0.68) = $28,000 ÷ 0.32 = $87,500. At this revenue level, total costs equal total revenue.
Why This Is the Correct Answer
The break-even formula correctly calculates the revenue needed where total costs equal total revenue. At $87,500 revenue, variable costs are $59,500 (68% of $87,500) plus fixed costs of $28,000 equals $87,500 total costs. This demonstrates the break-even point where revenue exactly covers all expenses with zero profit or loss.
Why the Other Options Are Wrong
Option A: $95,000
$75,000 is insufficient revenue - at this level, variable costs would be $51,000 (68% of $75,000) plus $28,000 fixed costs equals $79,000 total costs, which exceeds the $75,000 revenue by $4,000, resulting in a loss.
Option B: $75,000
$92,500 exceeds the break-even point - at this revenue level, total costs would be $90,900 ($62,900 variable + $28,000 fixed), leaving a profit of $1,600 rather than breaking even.
Option D: $92,500
$95,000 significantly exceeds break-even - total costs would be $92,600 ($64,600 variable + $28,000 fixed), resulting in a $2,400 profit rather than the zero profit/loss required for break-even.
Memory Technique
Think 'Fixed costs need to be COVERED by the margin left after variables' - so divide fixed costs by what's LEFT (1 minus variable percentage)
Reference Hint
Business and Finance for Contractors - Chapter on Financial Analysis and Break-Even Analysis, or Construction Accounting and Financial Management sections
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