CSLB Law & Business ExamBusiness FinancesMedium
A contractor is setting up a new project's budget. The project is expected to generate $250,000 in revenue. The direct costs (materials, labor, subcontracts) for the project are estimated at $150,000. What is the contribution margin for this project?
- A$400,000
- B$250,000
- C$150,000
- D$100,000
Show answer & explanationAnswer & explanation
Correct answer: D. $100,000
The contribution margin is the revenue remaining to cover fixed costs after variable costs (direct costs in this case) have been covered. It is calculated as Total Revenue - Total Variable Costs. So, $250,000 (Revenue) - $150,000 (Direct Costs) = $100,000.
Why the other options are wrong
- A. This is the sum of revenue and direct costs, which is not a standard financial metric.
- B. This is the total revenue, not the contribution margin.
- C. This is the direct costs, not the contribution margin.
Contribution Margin
The revenue remaining to cover fixed costs after variable costs have been subtracted. It indicates how much profit is available to cover fixed costs and contribute to overall profit.
- Calculated as Total Revenue - Total Variable Costs.
- Can be calculated per unit or as a total amount.
- Crucial for break-even analysis and pricing decisions.
Memory trick: Contribution: Revenue minus the Direct Variable Costs.