Lecture no29 profit from operation

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Contemporary Engineering Economics, 6 th edition

Estimating Profit from

Production

Lecture No 29 Chapter 8 Contemporary Engineering Economics

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Calculation of Operating Income

 Operating revenue : The income earned by a business

as a result of providing products or services to customers

 Operating expenses : The expenses incurred to

generate the revenues of the specified operating period

 Operating income : The difference between the

operating revenue and operating expenses

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Process of Creating a Master Production

Budget

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Sales Budget for a Manufacturing Business

Total annual volume = 5,000 units

Unit sales price = $15

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Preparing the Production Budget

Desired ending inventory: 20% of the budgeted units

Desired Beginning inventory position: 100 units

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Direct Materials Budget

• Year 2016: Product X

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Direct Labor Budget

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Overhead Budget

Variable overhead rate = $1.50

per unit

Fixed overhead rate = $230 per

quarter

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Cost of Goods Sold Budget

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Selling Expenses Budget

Variable commission rate = 5% of unit sales

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Administrative Expenses Budget

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The Budgeted Income Statement

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Measures for Expected Profitability

• Gross margin

Gross margin = Gross income/Net sales

= $31,589/$75,000 = 42.12%

• Operating margin

Operating margin = Operating income/Net sales = $13,899/$75,000 = 18.53%

• Net profit margin

Net profit margin = Net income/Net sales

= $9,034/$75,000 = 12.05%

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