Estimating Profit from Production Lecture No 29 Chapter Contemporary Engineering Economics Copyright © 2016 Contemporary Engineering Economics, th edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved 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, th edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved Process of Creating a Master Production Budget Contemporary Engineering Economics, th edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved Sales Budget for a Manufacturing Business Total annual volume = 5,000 units Unit sales price = $15 Contemporary Engineering Economics, th edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved Preparing the Production Budget Desired ending inventory: 20% of the budgeted units Desired Beginning inventory position: 100 units Contemporary Engineering Economics, th edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved Direct Materials Budget • Year 2016: Product X Contemporary Engineering Economics, th edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved Direct Labor Budget Contemporary Engineering Economics, th edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved Overhead Budget Variable overhead rate = $1.50 per unit Fixed overhead rate = $230 per quarter Contemporary Engineering Economics, th edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved Cost of Goods Sold Budget Contemporary Engineering Economics, th edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved Selling Expenses Budget Variable commission rate = 5% of unit sales Contemporary Engineering Economics, th edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved Administrative Expenses Budget Contemporary Engineering Economics, th edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved The Budgeted Income Statement Contemporary Engineering Economics, th edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved 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, th edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved ... 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... edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved Measures for Expected Profitability • Gross margin Gross margin = Gross income/Net sales = $31,589/$75,000 = 42.12% •