A contractor's home office overhead includes $85,000 annual rent, $120,000 salaries, and $45,000 other expenses. If they plan $2,500,000 in annual volume, what overhead percentage should be applied to bids?
Correct Answer
A) 10.0%
Total overhead: $85,000 + $120,000 + $45,000 = $250,000. Overhead percentage: $250,000 ÷ $2,500,000 = 10.0%.
Why This Is the Correct Answer
To calculate overhead percentage, first sum all overhead costs: $85,000 (rent) + $120,000 (salaries) + $45,000 (other) = $250,000 total overhead. Then divide by planned annual volume: $250,000 ÷ $2,500,000 = 0.10 = 10.0%. This percentage represents the portion of each project dollar needed to cover home office overhead expenses.
Why the Other Options Are Wrong
Option C: 10.8%
8.5% would result from incorrectly calculating total overhead as $212,500 instead of $250,000, possibly by omitting one of the overhead categories or making an arithmetic error in the addition of the three overhead components.
Option D: 8.5%
9.2% would result from calculating total overhead as $230,000 instead of $250,000, likely from an error in adding the overhead components or possibly using an incorrect annual volume figure in the denominator.
Memory Technique
Remember 'RAG' for overhead: Rent + Administrative salaries + General expenses. Then divide total by annual volume for percentage.
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