1. Contemporary Engineering Economics, 4 th edition, © 2007 Estimating Profit from Production Lecture No. 31 Chapter 8 Contemporary Engineering Economics Copyright © 2007

2. Contemporary Engineering Economics, 4 th 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

3. Contemporary Engineering Economics, 4 th edition, © 2007 Process of Creating a Master Production Budget

4. Contemporary Engineering Economics, 4 th edition, © 2007 Sales Budget for a Manufacturing Business Total annual volume = 5,000 units Unit sales price = $15

5. Contemporary Engineering Economics, 4 th edition, © 2007 Preparing the Production Budget Desired ending inventory units to carry: 20% of the budgeted units Beginning inventory position: 100 units

6. Contemporary Engineering Economics, 4 th edition, © 2007 Materials Budget

7. Contemporary Engineering Economics, 4 th edition, © 2007 Direct Labor Budget Labor cost per unit = $3.00

8. Contemporary Engineering Economics, 4 th edition, © 2007 Overhead Budget Variable overhead rate = $1.50 per unit Fixed overhead rate = $230 per quarter

9. Contemporary Engineering Economics, 4 th edition, © 2007 Cost of Goods Sold Budget

10. Contemporary Engineering Economics, 4 th edition, © 2007 Selling Expenses Budget Variable commission rate = 5% of unit sales

11. Contemporary Engineering Economics, 4 th edition, © 2007 Administrative Expenses Budget

12. Contemporary Engineering Economics, 4 th edition, © 2007 The Budgeted Income Statement

13. Contemporary Engineering Economics, 4 th 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%