CSLB Law & Business ExamBusiness FinancesHard
A contractor's original contract has a price of $50,000 with an estimated direct cost of $40,000. A change order adds $10,000 in additional direct costs, and the contractor bills the customer $12,000 for the change order. What is the overall gross profit margin for the completed project including the change order?
- A24.0%
- B19.4%
- C20.0%
- D16.1%
Show answer & explanationAnswer & explanation
Correct answer: B. 19.4%
Total price = $50,000 + $12,000 = $62,000. Total cost = $40,000 + $10,000 = $50,000. Total profit = $62,000 − $50,000 = $12,000. Margin = $12,000 ÷ $62,000 ≈ 19.4%.
Why the other options are wrong
- A. This overstates the margin; it does not reflect the actual combined totals.
- C. This equals the original contract's margin before the change order, not the combined result.
- D. This understates the margin by using an incorrect total price or cost figure.
Change Order Impact on Job Margin
Adding a change order changes both total contract price and total costs, requiring recalculation of overall project profit margin.
- Combine original and change order costs for total cost
- Combine original and change order price for total revenue
- Margin = Total profit ÷ Total price
Memory trick: A change order isn't separate — fold it into the whole pie before slicing the margin.