Overhead & Profit Calculation Flashcards

A contractor wants a 12% profit on the selling price (not cost). If direct costs plus overhead total $88,000, what should the bid price be?

Answer: $100,000

Bid price = $88,000 ÷ (1 − 0.12) = $88,000 ÷ 0.88 = $100,000.

Which of the following best describes the break-even point for a construction company?

Answer: The revenue level at which total costs equal total income with zero profit

Break-even is when total revenue exactly covers all costs—direct and overhead—leaving zero net profit.

A contractor's job overhead for a project includes: superintendent salary $15,000, portable toilets $600, temporary power $1,200, and job trailer $2,400. What is the total job overhead?

Answer: $19,200

$15,000 + $600 + $1,200 + $2,400 = $19,200.

Why might a contractor apply a HIGHER profit margin on a risky or complex project?

Answer: To account for the increased likelihood of cost overruns and uncertainties

Higher risk projects warrant higher profit margins to compensate for potential cost overruns and uncertainties.

If a contractor's markup on cost is 25%, what is the equivalent margin (profit as a percentage of selling price)?

Answer: 20%

Margin = markup ÷ (1 + markup) = 0.25 ÷ 1.25 = 20%.

A contractor's annual fixed overhead is $300,000. If volume increases by 20% next year with no change in overhead, what happens to the overhead rate per dollar of direct cost?

Answer: It decreases by approximately 17%

Higher volume spread over fixed overhead reduces the overhead rate; $300,000 ÷ (1.2 × base) = rate drops ~17%.

On a lump-sum contract, where does the risk of overhead cost overruns primarily fall?

Answer: The contractor

On a lump-sum contract, the contractor bears the risk if actual overhead exceeds the estimated amount included in the bid.