A general contractor's total annual overhead is $480,000. The company expects to generate $2,400,000 in revenue this year. What is the overhead percentage that should be applied to each project?
Correct Answer
B) 20%
Overhead percentage is calculated by dividing total overhead by total revenue: $480,000 ÷ $2,400,000 = 0.20 or 20%. This percentage should be applied to each project to ensure overhead costs are properly allocated.
Why This Is the Correct Answer
The overhead percentage is calculated by dividing total annual overhead costs by total annual revenue. This gives us $480,000 ÷ $2,400,000 = 0.20 or 20%. This percentage represents the portion of each project's revenue that must be allocated to cover the company's overhead expenses. Applying this 20% to each project ensures that all overhead costs are properly distributed across all work performed during the year.
Why the Other Options Are Wrong
Option A: 15%
15% would only recover $360,000 in overhead costs ($2,400,000 × 0.15), leaving the contractor $120,000 short of covering their actual $480,000 in overhead expenses.
Option C: 25%
25% would result in over-recovery of overhead costs, collecting $600,000 ($2,400,000 × 0.25) when only $480,000 is needed, making bids unnecessarily high and potentially uncompetitive.
Option D: 30%
30% would significantly over-recover overhead costs, collecting $720,000 ($2,400,000 × 0.30) when only $480,000 is required, resulting in inflated pricing that could lose jobs to competitors.
Memory Technique
Think 'OH/REV = %' (Overhead divided by Revenue equals percentage). Also remember that overhead percentage typically ranges from 10-25% for most contractors, so extreme answers like 30% should raise red flags.
Reference Hint
Look up 'Overhead Calculations' or 'Project Cost Estimating' in your construction business management or estimating reference materials, typically found in chapters covering indirect costs or markup calculations.
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