1. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Estimating Profit from Production Lecture No. 29 Chapter 8 Contemporary Engineering Economics Copyright © 2016

2. Contemporary Engineering Economics, 6 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

3. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Process of Creating a Master Production Budget

4. Contemporary Engineering Economics, 6 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

5. Contemporary Engineering Economics, 6 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

6. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Direct Materials Budget Year 2016: Product X

7. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Direct Labor Budget

8. Contemporary Engineering Economics, 6 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

9. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Cost of Goods Sold Budget

10. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Selling Expenses Budget Variable commission rate = 5% of unit sales

11. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Administrative Expenses Budget

12. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved The Budgeted Income Statement

13. Contemporary Engineering Economics, 6 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%