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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

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

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Page 1: 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

Page 2: 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

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

Page 3: 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

Process of Creating a Master Production Budget

Page 4: 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

Sales Budget for a Manufacturing Business

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

Page 5: 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

Preparing the Production Budget

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

Page 6: 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

Direct Materials Budget

• Year 2016: Product X

Page 7: 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

Direct Labor Budget

Page 8: 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

Overhead Budget

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

Page 9: 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

Cost of Goods Sold Budget

Page 10: 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

Selling Expenses Budget

Variable commission rate = 5% of unit sales

Page 11: 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

Administrative Expenses Budget

Page 12: 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

The Budgeted Income Statement

Page 13: 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

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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