CSLB Law & Business ExamBusiness FinancesMedium
A contractor wants a 25% gross profit margin on a job with direct costs of $12,000. What price should the contractor charge the customer?
- A$15,000
- B$16,000
- C$18,000
- D$15,600
Show answer & explanationAnswer & explanation
Correct answer: B. $16,000
To achieve a desired margin (based on selling price), use Price = Cost ÷ (1 − Margin) = $12,000 ÷ (1 − 0.25) = $12,000 ÷ 0.75 = $16,000. Simply adding 25% to cost ($15,000) would only produce a 20% margin, not 25%.
Why the other options are wrong
- A. This is a 25% markup on cost, which yields only a 20% margin, not 25%.
- C. Overstates the required price beyond a 25% margin.
- D. Does not match the correct margin formula result.
Solving for Price from Margin
To achieve a target gross profit margin (percentage of selling price), divide cost by (1 minus the margin percentage), not simply add the margin percentage to cost.
- Formula: Price = Cost ÷ (1 - Margin%)
- Adding markup % to cost does NOT equal the same margin %
- Confusing markup and margin is a common contractor pricing error
Memory trick: Divide by (1-margin), don't just add the percentage.