CSLB Law & Business ExamBusiness FinancesMedium
A contractor is evaluating the profitability of a recently completed project. The project had a total contract price of $100,000, direct costs of $60,000, and allocated overhead of $20,000. What was the gross profit for this project?
- A$20,000
- B$40,000
- C$80,000
- D$60,000
Show answer & explanationAnswer & explanation
Correct answer: B. $40,000
Gross profit is calculated by subtracting the direct costs (Cost of Goods Sold) from the total contract price (revenue). Allocated overhead is considered when calculating net profit, not gross profit. $100,000 (Revenue) - $60,000 (Direct Costs) = $40,000 Gross Profit.
Why the other options are wrong
- A. This would be the net profit if overhead was subtracted from gross profit ($40k - $20k).
- C. This would be the result if direct costs were added to revenue, which is incorrect.
- D. This is the direct costs themselves, not the profit.
Gross Profit
The profit a company makes after deducting the costs associated with making and selling its products or providing its services (direct costs) from its revenue.
- Calculated as Revenue - Cost of Goods Sold (Direct Costs).
- Does not include operating expenses or indirect overhead.
- Indicates the profitability of core operations before overhead.
Memory trick: Gross is before overhead, Net is after everything.