Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Estimating Profit from Production

Contemporary Engineering Economics, 6th editionPark

Copyright © 2016 by Pearson Education, Inc.All Rights Reserved

Estimating Profit from Production

Lecture No. 29Chapter 8

Contemporary Engineering EconomicsCopyright © 2016



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



Process of Creating a Master Production Budget



Sales Budget for a Manufacturing Business

Total annual volume = 5,000 unitsUnit sales price = $15



Preparing the Production Budget

Desired ending inventory: 20% of the budgeted unitsDesired Beginning inventory position: 100 units



Direct Materials Budget

• Year 2016: Product X



Direct Labor Budget



Overhead Budget

Variable overhead rate = $1.50 per unitFixed overhead rate = $230 per quarter



Cost of Goods Sold Budget



Selling Expenses Budget

Variable commission rate = 5% of unit sales



Administrative Expenses Budget



The Budgeted Income Statement



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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Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Estimating Profit from Production