contemporary engineering economics, 4 th edition, © 2007 estimating profit from production lecture...
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Contemporary Engineering
Economics, 4th edition, © 2007
Estimating Profit from Production
Lecture No. 31Chapter 8Contemporary Engineering EconomicsCopyright © 2007
Contemporary Engineering
Economics, 4th edition, © 2007
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, 4th edition, © 2007
Process of Creating a Master Production Budget
Contemporary Engineering
Economics, 4th edition, © 2007
Sales Budget for a Manufacturing Business
Total annual volume = 5,000 unitsUnit sales price = $15
Contemporary Engineering
Economics, 4th edition, © 2007
Preparing the Production BudgetDesired ending inventory units to carry: 20% of the budgeted unitsBeginning inventory position: 100 units
Contemporary Engineering
Economics, 4th edition, © 2007
Materials Budget
Contemporary Engineering
Economics, 4th edition, © 2007
Direct Labor Budget
Labor cost per unit = $3.00
Contemporary Engineering
Economics, 4th edition, © 2007
Overhead BudgetVariable overhead rate = $1.50 per unitFixed overhead rate = $230 per quarter
Contemporary Engineering
Economics, 4th edition, © 2007
Cost of Goods Sold Budget
Contemporary Engineering
Economics, 4th edition, © 2007
Selling Expenses BudgetVariable commission rate = 5% of unit sales
Contemporary Engineering
Economics, 4th edition, © 2007
Administrative Expenses Budget
Contemporary Engineering
Economics, 4th edition, © 2007
The Budgeted Income Statement
Contemporary Engineering
Economics, 4th edition, © 2007
Measures for Profitability
Gross Margin
Gross margin = Gross income/Net sales
= $40,000/$75,000 = 53%
Operating margin
Operating margin = Operating income/Net sales
= $22,310/$75,000 = 30%
Net Profit margin Net profit margin = Net income/Net sales
= $14,502/$75,000 = 19%