CSLB Business Finances Practice Questions

1. A contractor estimates a job will cost $80,000 in direct costs and wants a 25% markup on cost. What should the bid price be?

Markup on cost means adding the markup percentage to the cost: $80,000 × 1.25 = $100,000. Markup on cost and margin on sales produce different results — always clarify which method is being used.

2. What is the difference between "markup" and "margin"?

Markup is the profit added as a percentage of cost. Gross margin (gross profit margin) is profit expressed as a percentage of the selling (contract) price. A 25% markup ≠ 25% margin.

3. A contractor has fixed monthly overhead of $10,000 and a variable cost ratio of 70% of revenue. What monthly revenue is needed to break even?

Break-even = Fixed Costs ÷ (1 − Variable Cost Ratio) = $10,000 ÷ (1 − 0.70) = $10,000 ÷ 0.30 = $33,333. At this revenue, total costs equal total revenue.

4. Which of the following is considered a FIXED cost for a contracting business?

A fixed cost does not move with the amount of work: the office rent is the same whether one job runs or ten, so it is overhead recovered across all of them. Subcontractor fees, job materials and fuel burned on the job all scale with the work and are direct, variable costs charged to the job that consumed them. The practical caution is that some costs sit between the two: a general liability premium is often rated on payroll or receipts and audited at year end, so it is less strictly fixed than rent.

5. A contractor's job cost sheet shows: Materials $30,000, Labor $20,000, Subcontractors $15,000, Overhead allocation $10,000. What is the total direct job cost?

The stem asks for DIRECT job cost — the costs traceable to this project. Materials $30,000 + labor $20,000 + subcontractors $15,000 = $65,000 (a). The $10,000 overhead allocation is an INDIRECT cost: it is a share of office rent, insurance and administrative salaries spread across every job, not a cost caused by this one. Adding it gives $75,000 (b), which is the job's fully loaded cost, not its direct cost — that substitution is the whole trap. (c) $50,000 drops the subcontractors, and (d) $45,000 counts only materials and overhead.

6. A contractor takes out a $50,000 equipment loan at 8% annual interest. What is the simple interest owed for 6 months?

Simple interest = Principal × Rate × Time = $50,000 × 0.08 × 0.5 = $2,000. For 6 months (half year), use 0.5 as the time factor.

7. Cash flow problems in contracting most commonly occur when:

The gap is a timing gap: payroll, suppliers and subcontractors must be paid weeks before the owner pays the progress billing, and retention holds back part of it longer still, which is why a profitable job can still leave the bank empty. An overhead rate set too low destroys margin, but that is a pricing error and shows up as loss rather than as a cash gap. Finishing early accelerates billing and helps cash. And full depreciation is a book event with no cash effect at all.

8. A contractor prepares an estimate and adds 15% to cover overhead and 10% profit on top of that. If direct costs are $50,000, what is the bid price?

$50,000 × 1.15 (overhead) = $57,500; $57,500 × 1.10 (profit) = $63,250. Overhead is applied first to the cost, then profit is applied to the overhead-loaded cost.