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
D) 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: 25%
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.
Option B: 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.
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.
More Business & Finance Questions
A general contractor purchases equipment worth $45,000 with a useful life of 9 years and no salvage value. Using straight-line depreciation, what is the annual depreciation expense?
What is the typical recommended coverage amount for general liability insurance for a small to medium-sized general contracting business?
A contractor estimates startup costs of $75,000 for equipment, $25,000 for initial inventory, $15,000 for insurance premiums, and $10,000 for working capital. They can finance 70% of the total. How much cash do they need?
When establishing professional relationships with architects and engineers, what is the most important factor for a general contractor to consider?
A partnership agreement for a construction company should address all of the following EXCEPT:
A contractor purchases a truck for $60,000. After 5 years, it has accumulated depreciation of $35,000. What is the truck's book value?
A contractor's business plan projects first-year revenue of $500,000 with a 15% net profit margin. If actual revenue is $450,000 with the same profit margin, what is the variance in net profit?
Using the Modified Accelerated Cost Recovery System (MACRS), construction equipment is typically depreciated over how many years?
A contractor is comparing financing options for equipment purchase. Option A: $80,000 cash purchase. Option B: $20,000 down, $65,000 financed at 6% for 4 years. What is the total cost of Option B?
A contractor purchases equipment using a capital lease with a present value of $120,000. How should this be recorded on the balance sheet?
People Also Study
Related Study Resources
Previous Question
A general contractor is behind on several supplier payments due to cash flow issues. Which strategy would be most appropriate for managing accounts payable in this situation?
Next Question
A contractor's workers' compensation insurance lapses on March 15th, and work continues until March 22nd. The contractor has 3 employees working those 7 days at $25/hour for 8 hours daily. What is the potential fine calculation base under Florida law?