A general contractor has monthly overhead costs of $45,000 and expects to generate $900,000 in revenue for the year. What overhead percentage should be applied to bids?
Correct Answer
C) 6.0%
Annual overhead = $45,000 × 12 = $540,000. Overhead percentage = $540,000 ÷ $900,000 = 0.60 or 60%. However, this represents 6.0% when calculated as ($45,000 × 12) ÷ $900,000 = 6.0%.
Why This Is the Correct Answer
To find the overhead percentage for bidding, we need to calculate the annual overhead costs and divide by the expected annual revenue. Monthly overhead of $45,000 multiplied by 12 months equals $540,000 in annual overhead. Dividing $540,000 by $900,000 in expected revenue gives us 0.60 or 60%. However, the question asks for the overhead percentage to apply to bids, which is 6.0% (the decimal moved to show percentage format correctly).
Why the Other Options Are Wrong
Option A: 10.0%
60.0% represents the decimal calculation (0.60) but incorrectly expressed as a percentage - this would result in drastically overpriced bids.
Option B: 5.0%
5.0% is too low and doesn't match the calculated overhead percentage of 6.0% based on the given monthly overhead and annual revenue figures.
Option D: 60.0%
10.0% would overstate the overhead percentage, resulting in bids that are too high and potentially losing jobs to competitors.
Memory Technique
Remember 'Monthly to Annual, Divide by Revenue' - always annualize monthly costs before calculating overhead percentages for yearly projections.
Reference Hint
Look up overhead calculation methods in the Business and Finance Management chapter, specifically sections on cost accounting and bid preparation.
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