CSLB Law & Business ExamBusiness FinancesHard
A contractor is setting up a new project's budget. The project is expected to generate $250,000 in revenue. Direct costs are estimated at $150,000. Fixed overhead allocated to this project is $40,000. What is the contribution margin for this project?
- A$210,000
- B$110,000
- C$60,000
- D$100,000
Show answer & explanationAnswer & explanation
Correct answer: D. $100,000
Contribution margin is the revenue remaining after subtracting variable costs (direct costs in this scenario). It represents the amount available to cover fixed costs and generate profit. Fixed overhead is covered by the contribution margin, but not subtracted from it to calculate the contribution margin itself. $250,000 (Revenue) - $150,000 (Direct Costs) = $100,000 Contribution Margin.
Why the other options are wrong
- A. Incorrect. This would be if fixed overhead was added to direct costs and then subtracted from revenue, or another miscalculation.
- B. Incorrect. This might be a miscalculation, perhaps subtracting fixed overhead incorrectly.
- C. This is the net profit ($100,000 contribution margin - $40,000 fixed overhead).
Contribution Margin
The revenue remaining after subtracting variable costs from sales revenue, representing the amount available to cover fixed costs and contribute to profit.
- Calculated as Sales Revenue - Variable Costs (often direct costs).
- Used in break-even analysis and to assess the profitability of individual products or projects.
- Does not include fixed costs in its calculation.
Memory trick: Contribution is what's left to 'contribute' to fixed costs and profit.