A general contractor's annual overhead is $480,000 and they typically complete $3,200,000 in annual volume. For a $125,000 project, what overhead amount should be allocated?
Correct Answer
C) $18,750
Overhead rate: $480,000 ÷ $3,200,000 = 15%. Project overhead: $125,000 × 15% = $18,750.
Why This Is the Correct Answer
To allocate overhead to a specific project, first calculate the overhead rate by dividing annual overhead by annual volume: $480,000 ÷ $3,200,000 = 0.15 or 15%. Then multiply the project value by this overhead rate: $125,000 × 15% = $18,750. This proportional allocation method ensures overhead costs are distributed fairly across all projects based on their relative size.
Why the Other Options Are Wrong
Option A: $15,625
$25,000 represents a 20% overhead rate, which significantly exceeds the actual 15% rate. This suggests either calculation errors or confusion between overhead and profit margins.
Option B: $25,000
$21,875 represents a 17.5% overhead rate, which is too high. This error likely comes from miscalculating the overhead percentage or adding an incorrect markup to the base calculation.
Option D: $21,875
$15,625 represents a 12.5% overhead rate ($15,625 ÷ $125,000), which is incorrect. This suggests using the wrong calculation method or misapplying the overhead percentage formula.
Memory Technique
Remember 'OAP': Overhead ÷ Annual volume = Percentage rate. Then apply this percentage to your Project value.
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