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Revenues are used for three key items; pay construction costs, Break-even volume of work: amount of work volume that is need
pay the general overheads, and to provide profit for investors in to be produced during the year to cover overhead cost and
the construction. provide a specified profit.
Construction costs: includes direct and non-direct (project Historical CM Ratio needs to be adjusted according to changing
overhead) cost from all the constructions of the project. market conditions.
General overhead cost: are the cost that are not attributed to Break-even Volume of work can be determined based profit value
any specific project. as follow:
Contribution margin: is the amount of money a project or projects Projecting Break-Even Contribution Margin Ratio
contribute to the company to be used to pay for fixed overhead - Setting profit to be equal to zero.
and provide a profit for the shareholders. Profit = CM Ratio (Revenues) - FixedOverhead
Contribution Margin = Revenues- Construction cost - VariableOH 0 = CM Ratio (Revenues) - FixedOverhead
FixedOverhead
Contribution Margin CM Ratio =
CM Ratio = Revenues
Revenues The company will need maintain CM ration to cover fixed
Revenues- Construction cost - VariableOH
or CM Ratio = overhead.
Revenues
If CM Ratio of company< ExpectedCM Ratio
Revenues Construction cost VariableOH
CM Ratio =
Revenues Revenues Revenues
it can not cover fixedOH and loses moneyin construction cost
Construction cost VariableOH
CM Ratio = 1 If CM Ratio of company> ExpectedCM Ratio
Revenues Revenues
CM Ratio of company ExpectedCM Ratio = Profit (%)
Also
- Setting profit equal to the required level of profit
Contribution Margin = CM Ratio (Revenues) Profit = CM Ratio (Revenues) - FixedOverhead
FixedOverhead + Profit
CM Ratio =
Revenues
The company will need maintain CM ration in order to
meet it profit requirements.
There are some reasons for increasing the profit and overhead
markup.
Bid
P & O Markup = 1
Construction Costs