A contractor's job cost report shows the following for Project ABC: Contract amount $150,000, Costs incurred to date $90,000, Estimated costs to complete $45,000. What is the estimated profit margin for this project?
Correct Answer
A) 10%
Total estimated costs = $90,000 + $45,000 = $135,000. Estimated profit = $150,000 - $135,000 = $15,000. Profit margin = $15,000 ÷ $150,000 = 10%.
Why This Is the Correct Answer
The correct answer is A (10%) because profit margin is calculated by dividing the estimated profit by the contract amount. First, we calculate total estimated costs by adding costs incurred to date ($90,000) plus estimated costs to complete ($45,000) = $135,000. Then we find estimated profit by subtracting total estimated costs from contract amount: $150,000 - $135,000 = $15,000. Finally, profit margin = $15,000 ÷ $150,000 = 0.10 or 10%.
Why the Other Options Are Wrong
Option C: 15%
25% would result from a major calculation error, possibly dividing costs by contract amount instead of profit by contract amount, or using an incorrect denominator in the profit margin formula.
Option D: 25%
20% would result from a significant calculation error, possibly using only the costs incurred to date instead of total estimated costs, or confusing markup percentage with profit margin calculations.
Memory Technique
Remember 'Contract Contains the margin' - always divide by the Contract amount for profit margin calculations, not by costs.
Reference Hint
Construction Project Management or Cost Control chapters in contractor reference materials, specifically sections on job costing and profit analysis.
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