A general contractor is starting a new business and estimates monthly fixed costs of $8,500 and variable costs of 65% of revenue. What monthly revenue is needed to break even?
Correct Answer
A) $24,286
Break-even revenue = Fixed Costs ÷ (1 - Variable Cost %). $8,500 ÷ (1 - 0.65) = $8,500 ÷ 0.35 = $24,286.
Why This Is the Correct Answer
Option C is correct because the break-even formula requires dividing fixed costs by the contribution margin ratio (1 - variable cost percentage). With fixed costs of $8,500 and variable costs at 65% of revenue, the contribution margin is 35% (100% - 65%). Dividing $8,500 by 0.35 gives exactly $24,286, which is the revenue needed where total costs equal total revenue.
Why the Other Options Are Wrong
Option B: $13,077
$20,000 is insufficient revenue that would result in a loss, as it doesn't account for the proper contribution margin calculation needed to cover all fixed costs
Option C: $28,500
$13,077 is too low and appears to be calculated incorrectly, possibly by dividing fixed costs by the variable cost percentage (65%) instead of the contribution margin percentage (35%)
Option D: $20,000
$28,500 is too high and would generate a profit above break-even, possibly calculated by adding fixed costs to some arbitrary amount rather than using the proper break-even formula
Memory Technique
Remember 'FRED': Fixed costs ÷ (Revenue percentage - Expense percentage) = Break-even point. The contribution margin is what's LEFT after variable costs.
Reference Hint
Look up 'Break-Even Analysis' or 'Cost-Volume-Profit Analysis' in business management or construction accounting chapters
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