CSLB Law & Business ExamBusiness FinancesMedium
A contractor is evaluating the profitability of a recently completed project. The project generated total revenue of $75,000. Direct costs for the project (materials, labor, subcontracts) totaled $45,000. Indirect costs allocated to this project (e.g., portion of office rent, administrative salaries) amounted to $15,000. What is the net profit for this project?
- A$15,000
- B$60,000
- C$30,000
- D$75,000
Show answer & explanationAnswer & explanation
Correct answer: A. $15,000
Net profit is calculated by subtracting all direct and indirect project costs from the total revenue. So, $75,000 (Revenue) - $45,000 (Direct Costs) - $15,000 (Indirect Costs) = $15,000.
Why the other options are wrong
- B. This is an incorrect calculation that sum costs, but does not correctly relate to net profit.
- C. This represents the gross profit ($75,000 - $45,000) before indirect costs are considered.
- D. This is the total revenue, not the net profit.
Net Profit
Net profit (or net income) is the amount of money a business has left after all expenses, including operating expenses, interest, and taxes, have been deducted from total revenue.
- The 'bottom line' of a company's profitability
- Calculated as Total Revenue - Total Expenses
- Indicates the overall financial success of a project or business
Memory trick: Net Profit: Revenue minus ALL costs, direct and indirect, to see what's 'Net' for you.