Lecture no29 profit from operation
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Estimating Profit from
Production
Lecture No. 29
Chapter 8
Contemporary Engineering Economics
Copyright © 2016
Contemporary Engineering Economics, 6 th edition
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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
Contemporary Engineering Economics, 6 th edition
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Process of Creating a Master Production
Budget
Contemporary Engineering Economics, 6 th edition
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Sales Budget for a Manufacturing Business
Total annual volume = 5,000 units
Unit sales price = $15
Contemporary Engineering Economics, 6 th edition
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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
Contemporary Engineering Economics, 6 th edition
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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%
Contemporary Engineering Economics, 6 th edition
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