Notional profit on a contract is RS 90000 . And 60 % of the contract i...
Calculation of Profit on Contract:
- Notional profit on contract = RS 90000
- 60% of the contract is completed
Therefore, profit earned on the completed work is:
Profit on completed work = Notional profit x % of work completed
Profit on completed work = 90000 x 60/100 = RS 54000
Payment Received from Customer:
- Customer pays 80% of work certified
Therefore, payment received from the customer on the completed work is:
Payment received = 80% of work certified x profit on completed work
Payment received = 80/100 x 54000 = RS 43200
Contingency Reserve:Contingency reserve is the amount of profit that is kept aside to cover any unforeseen expenses or losses that may arise during the project.
The formula to calculate contingency reserve is:
Contingency reserve = (Notional profit - Profit on completed work) x % of work completed
Contingency reserve = (90000 - 54000) x 60/100 = RS 18000
Therefore, the amount of profit to be reserved for contingencies is RS 18000. Answer option 3 is correct.