CSLB Law & Business ExamBusiness FinancesHard
A contractor's direct job costs are $40,000. The contractor needs the job price to cover 15% overhead and also generate a 10% net profit, both figured as a percentage of the total selling price. What price must be charged?
- A$50,000
- B$53,333
- C$56,000
- D$46,000
Show answer & explanationAnswer & explanation
Correct answer: B. $53,333
Since overhead and profit are percentages of the final selling price, Price = Cost ÷ (1 − Overhead% − Profit%) = $40,000 ÷ (1 − 0.15 − 0.10) = $40,000 ÷ 0.75 = $53,333.33. Simply adding 25% to cost would undercharge and fail to hit both percentage targets of the final price.
Why the other options are wrong
- A. Simple addition of cost + 25% markup, which understates the needed price.
- C. Overstates the price beyond what the formula requires.
- D. This equals cost plus 15%, ignoring the profit percentage of price.
Combined Overhead & Profit Pricing
When overhead and profit targets are expressed as percentages of the total selling price, price must be found by dividing cost by (1 minus the combined percentages), not by simple addition.
- Price = Cost ÷ (1 - Overhead% - Profit%)
- Percentages 'of selling price' require division, not addition
- Common error: treating percentages as if based on cost (markup)
Memory trick: When it's 'of the price,' divide — don't just add.