A general contractor has direct costs of $850,000, overhead costs of $127,500, and wants a 12% profit margin on total costs. What should be the contract price?
Correct Answer
D) $1,094,400
Total costs = $850,000 + $127,500 = $977,500. Contract price = $977,500 × 1.12 = $1,094,400
Why This Is the Correct Answer
Option A correctly calculates the contract price by first determining total costs ($850,000 direct + $127,500 overhead = $977,500), then applying the 12% profit margin to total costs. The calculation is $977,500 × 1.12 = $1,094,400. This method ensures the contractor receives exactly 12% profit on all project costs, which is the standard approach for cost-plus pricing in construction contracts.
Why the Other Options Are Wrong
Option A: $1,077,500
This answer of $1,102,300 overestimates the contract price. It may result from calculation errors such as applying profit margins incorrectly or adding percentages instead of multiplying. The correct total cost base and profit calculation yield $1,094,400, making this option $7,900 too high.
Option B: $1,095,000
This answer of $1,095,000 appears to round the correct calculation incorrectly or use an approximation. The precise calculation yields $1,094,400, making this option $600 too high. In construction contracts, precise calculations are essential for accurate bidding and profit margins.
Memory Technique
Remember 'TOTAL TIMES' - Total costs (direct + overhead) Times profit multiplier (1 + profit %). For 12% profit: Total × 1.12 = Contract price.
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