Answer: Recognized $12.68 million gross profit on the project in 2022
Explanation:
Firstly we would need to ascertain the percentage of completion in 2022. We will do this by using the costs.
The cost incurred till date is,
= $32 million (incurred in 2021) + $59 million (incurred in 2022)
= $91 million. (1)
A further $37 million is estimated to remain in costs by project completion so the total cost would be,
= $91 million + 37 million
= $128 million is the total cost to be incurred. (2)
Dividing (1) by (2) to find out how much costs have been incurred vs how much is life we have,
= 91 / 128
= 0.7109
= 71 %
71 % of the project has been completed.
We will now find out the revenue for that very year using the percentage of the project completed.
The Total Revenue is $163 million so we will take 71% of that,
= 0.71(163)
= $115.73 million can be recognized as revenue TILL DATE. (3)
To find out the Revenue for the year then we can deduct the revenue of the previous year from the Revenue till date to find out the revenue for 2022.
But first we need to find the revenue of 2021 using the same method we used to calculate the Revenue this far
= 32 million / (32 + 86 million) * 163 million
= $44.01 million in revenue in 2021 (4)
Subtracting (4) from (3) to get the revenue for 2022 we have,
= 115.73 - 44.01
= $71.72 million is therefore the revenue for the year 2022
Calculating the gross profit for the year 2022 then we can subtract the cost in 2022 from the revenue for 2022.
= 71.72 million - 59 million
= $12.72 million
The answer we got is off by $0.04 from option C so we will pick Option C as the correct answer with the discrepancy going down to rounding off errors in the Intermediate Calculation.
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