Gross Profit, Net Profit
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Gross profit, net profit per capital investment. Total annual product cost equals the total annual sales.
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Discounted payback period
The document discusses various capital budgeting techniques including discounted payback period and net present value (NPV). It provides an example calculation of discounted payback period for a project that pays back in 3 years. While discounted payback includes the time value of money, it does not consider cash flows after the payback date or whether NPV is positive. NPV is described as the best measure as it directly shows whether a project will increase owner wealth by accounting for the time value of money and all cash flows. The internal rate of return (IRR) is also discussed as an alternative to NPV for evaluating projects.
Job costing
Job costing and process costing are two types of costing methods. Job costing is used when production is done in small batches to meet specific customer orders, with identifiable units tracked through production. Process costing is used for continuous production like chemicals, where costs are averaged over total units produced. Key differences are job costing tracks individual jobs while process costing averages costs over production batches. Both aim to determine accurate costs to measure profitability.
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Rate of return
This document defines accounting rate of return (ARR) as the ratio of estimated accounting profit to average investment of a project. It ignores the time value of money. ARR is calculated by dividing average accounting profit by initial investment. Average accounting profit is the mean of annual profits over the project life. Initial investment may be replaced by average investment due to declining book value over time. Projects are accepted if their ARR is not less than the required rate of return. Examples show calculating ARR for projects with given cash flows. ARR is an easy method but ignores the time value of money and can be calculated inconsistently using accounting versus cash flows.
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Marginal Costing
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Theory of cost
The document discusses the concept of cost and various types of costs from the perspective of the theory of cost. It defines cost and explains opportunity cost versus actual cost. It then outlines 10 main types of costs including direct vs indirect costs, fixed vs variable costs, sunk vs incremental costs, and historical vs replacement costs. The document also discusses cost functions and how factors like output, scale, input prices, and technology influence the cost-output relationship in the short-run. Graphs and examples are provided to illustrate short-run total, average and marginal costs.
Elements of cost and cost sheet
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Discounted payback period
The document discusses various capital budgeting techniques including discounted payback period and net present value (NPV). It provides an example calculation of discounted payback period for a project that pays back in 3 years. While discounted payback includes the time value of money, it does not consider cash flows after the payback date or whether NPV is positive. NPV is described as the best measure as it directly shows whether a project will increase owner wealth by accounting for the time value of money and all cash flows. The internal rate of return (IRR) is also discussed as an alternative to NPV for evaluating projects.
Job costing
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Marginal Costing
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Theory of cost
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Payback period by harikrishnanan
Payback period (PP) is the number of years it takes for a company to recover its original investment in a project, when net cash flow equals zero. In the calculation of the payback period, the cash flows of the project must first be estimated. The payback period is then a simple calculation.
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life cycle costing
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Cost Accounting
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Process costing
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The Net Income (NI) approach proposes that a firm's value increases as it takes on more debt financing due to debt generally being a cheaper source of capital than equity. According to the NI approach, the costs of debt and equity remain constant regardless of capital structure, so the overall cost of capital declines as debt levels rise. However, the NI approach assumes unrealistic conditions like taxes being ignored and that more debt does not affect investor risk perceptions. It implies the maximum firm value occurs with 100% debt financing.
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Contract and Job costing
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- Contract costing is a variant of job costing applied to construction projects. Each contract is treated as a separate cost unit and costs are tracked separately for each contract over its duration.
- Key aspects of contract costing include maintaining separate accounts for each contract, charging costs incurred directly to the relevant contract, and payment being made based on certified work completed.
CVP Analysis
Cost-volume-profit (CVP) analysis examines how changes in volume, costs, and prices affect profits. It is used for managerial decisions like pricing, order acceptance, product promotion, and feasibility analysis. CVP analysis uses techniques like contribution margin analysis and break-even analysis under assumptions like linear revenues and expenses. Questions address profit levels at different volumes, the volume where costs equal revenues, and the effects of cost/price changes on profits.
Funds flow statement
The document discusses funds flow statements and their preparation. It provides definitions of key terms like working capital and flow of funds. It explains that a funds flow statement depicts changes in working capital between two balance sheet dates by analyzing changes in current assets and current liabilities. The summary also shows how to prepare schedules of changes in working capital and sources and uses of funds statements to analyze the flow of funds.
Depreciation
The document defines depreciation as the allocation of the depreciable amount of an asset over its estimated useful life. The objectives of depreciation are to match expenses with revenues and allocate the cost of an asset over the periods it benefits the company. Assets are depreciable if they are used for more than one accounting period and have a finite useful life. Common depreciation methods include straight-line, reducing balance, and production output. Capital expenditures extend the life or increase the value of an asset while revenue expenditures are consumed within an accounting period.
Job and batch costing
The document discusses job costing and batch costing. It defines job costing as a method where cost is compiled for specific jobs or work orders, rather than for stock. Cost is charged directly to jobs for materials, labor, and expenses. Overhead is apportioned to jobs based on department rates. Batch costing determines cost per unit by dividing total batch costs by the number of units in a batch. The document also discusses determining economic batch quantity to minimize setup and carrying costs, and provides examples of job and batch costing applications.
Standard costing presentation
Standard costing is a technique that involves setting predetermined standards for costs and comparing them to actual costs. Standards are set for materials, labor, overhead and sales prices/margins. Variances between standards and actuals are analyzed to identify reasons for differences and take corrective actions. It helps management evaluate performance, control costs, set budgets and motivate staff. Some key advantages include cost control, delegation, efficiency improvements, and anticipating future costs and profits. Limitations include requiring technical skills and difficulty separating controllable vs. uncontrollable variances.
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Cost behavior and contribution margin reporting
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Here are the steps to solve this problem:
1) Break-even point calculation:
- Direct production costs at 70% capacity = $280,000
- Fixed costs = $200,000
- Total costs = $280,000 + $200,000 = $480,000
- Sales at break-even = Total costs = $480,000
- Sales are $40 per unit
- So units at break-even = $480,000 / $40 = 12,000 units
2) Gross earnings and net profit at 100% capacity:
- Capacity = 14,000 units (12,000 units / 0.7 = 14,000 units at 100%)
- Sales =
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Standard costing involves setting predetermined expected costs for cost components like direct materials, direct labor, and factory overhead. Variances are calculated as the difference between actual and standard costs. This includes direct material, direct labor, and factory overhead variances. The direct material variance has a price and usage component. The factory overhead variance separates variable from fixed costs, with the controllable variance measuring variable cost efficiency and volume variance measuring fixed cost utilization.
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The document discusses the straight-line depreciation method. It allocates the same amount of depreciation expense each reporting period. To calculate straight-line depreciation, you need the cost, residual value, and useful life of the asset. The formula is Depreciation Expense = (Cost - Residual Value) / Useful Life. An example calculates depreciation expense of $2,400 per year for a van costing $16,000 over 4 years with a residual value of $6,400. The method can also be expressed as a percentage by dividing the annual depreciation expense by the original cost.
Cost Accounting
This document defines key concepts in cost accounting and cost management. It discusses how cost accounting provides information for both management and financial accounting by measuring and reporting costs. It also describes different types of costs like direct, indirect, fixed and variable costs. Finally, it summarizes standard costing and analysis of variance, which are techniques used to evaluate actual performance against pre-established cost standards.
Process costing
- Process costing is used to determine average costs for standardized goods produced through continuous processes. It involves allocating costs for multiple processes to the finished goods.
- The key steps are: recording costs by process, calculating production quantities, determining normal losses, and allocating costs between processes and finished goods using weighted average or FIFO methods.
- Process costing is common in industries like manufacturing, mining, chemicals where standardized goods are produced through sequential processes and normal losses are inherent.
Price discrimination
This document defines and provides examples of price discrimination. It discusses that price discrimination means selling the same product at different prices to different buyers. It provides examples of air ticket prices being lower when booked further in advance and movie theaters charging different ticket prices. The document also outlines the main types of price discrimination including by income, product nature, age, time, geography, and product use. It discusses conditions needed for price discrimination, including different demand elasticities among buyer groups and the ability to segment markets.
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The Net Income (NI) approach proposes that a firm's value increases as it takes on more debt financing due to debt generally being a cheaper source of capital than equity. According to the NI approach, the costs of debt and equity remain constant regardless of capital structure, so the overall cost of capital declines as debt levels rise. However, the NI approach assumes unrealistic conditions like taxes being ignored and that more debt does not affect investor risk perceptions. It implies the maximum firm value occurs with 100% debt financing.
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Contract and Job costing
This document discusses different types of costing methods including job costing and contract costing. It provides details on:
- Job costing is used to determine costs for specific jobs or orders and is commonly used in job order industries. Costs are tracked separately for each job.
- Contract costing is a variant of job costing applied to construction projects. Each contract is treated as a separate cost unit and costs are tracked separately for each contract over its duration.
- Key aspects of contract costing include maintaining separate accounts for each contract, charging costs incurred directly to the relevant contract, and payment being made based on certified work completed.
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The document discusses funds flow statements and their preparation. It provides definitions of key terms like working capital and flow of funds. It explains that a funds flow statement depicts changes in working capital between two balance sheet dates by analyzing changes in current assets and current liabilities. The summary also shows how to prepare schedules of changes in working capital and sources and uses of funds statements to analyze the flow of funds.
Depreciation
The document defines depreciation as the allocation of the depreciable amount of an asset over its estimated useful life. The objectives of depreciation are to match expenses with revenues and allocate the cost of an asset over the periods it benefits the company. Assets are depreciable if they are used for more than one accounting period and have a finite useful life. Common depreciation methods include straight-line, reducing balance, and production output. Capital expenditures extend the life or increase the value of an asset while revenue expenditures are consumed within an accounting period.
Job and batch costing
The document discusses job costing and batch costing. It defines job costing as a method where cost is compiled for specific jobs or work orders, rather than for stock. Cost is charged directly to jobs for materials, labor, and expenses. Overhead is apportioned to jobs based on department rates. Batch costing determines cost per unit by dividing total batch costs by the number of units in a batch. The document also discusses determining economic batch quantity to minimize setup and carrying costs, and provides examples of job and batch costing applications.
Standard costing presentation
Standard costing is a technique that involves setting predetermined standards for costs and comparing them to actual costs. Standards are set for materials, labor, overhead and sales prices/margins. Variances between standards and actuals are analyzed to identify reasons for differences and take corrective actions. It helps management evaluate performance, control costs, set budgets and motivate staff. Some key advantages include cost control, delegation, efficiency improvements, and anticipating future costs and profits. Limitations include requiring technical skills and difficulty separating controllable vs. uncontrollable variances.
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CEE 11.pptx
Here are the steps to solve this problem:
1) Break-even point calculation:
- Direct production costs at 70% capacity = $280,000
- Fixed costs = $200,000
- Total costs = $280,000 + $200,000 = $480,000
- Sales at break-even = Total costs = $480,000
- Sales are $40 per unit
- So units at break-even = $480,000 / $40 = 12,000 units
2) Gross earnings and net profit at 100% capacity:
- Capacity = 14,000 units (12,000 units / 0.7 = 14,000 units at 100%)
- Sales =
1Break-Even AnalysisMarketers need to understand break.docx
1
Break-Even Analysis
Marketers need to understand break-even
analysis because it helps them choose the
best pricing strategy and make smart
decisions about the short- and long-term
profitability of the product.
This is an analysis that tells you how many
products you need to sell to cover your costs.
Profitability
Profitability Definitions
Revenue the money we take in from sales
Cost the money it costs us to make and sell our product
Profit the money we have left over from our revenue
after we pay all of our costs
Revenue - Costs = Profit
Price the money a consumer pays for one unit of product
the money we take in from one unit of product
Price x Units = Revenue
Revenue/Units = Price
2
Exercise 1
Product
Units Sold in
August
Price per
Unit
Cost per Unit
Bulletin Board 400 $3.00 $1.00
Magnetic White Board 600 $4.00 $3.00
Combination Board 250 $5.00 $3.50
Exercise 1
1. What was Stick-It-Up’s total sales revenue in August?
2. What was Stick-It-Up’s total profit in August?
3. What product contributed the most to sales revenue in August?
What percentage of the sales revenue did it contribute?
4. What product contributed the most to profit in August? What
percentage of the profit did it contribute?
5. If sales of magnetic white boards went up by 20%, how much
more would it contribute to sales revenue? To profits?
6. Suppose that increasing sales of magnetic white boards by 20%
would cost the company $500 per month in advertising expenses.
Should they spend the $500 per month on additional advertising?
Exercise 1
What was Stick-It-Up’s total revenue in August?
Revenue from:
Bulletin Boards 400 x $3.00 $1,200.00
Magnetic White Boards 600 x $4.00 $2,400.00
Combination Boards 250 x $5.00 $1,250.00
Total Revenue $4,850.00
Product
Units Sold in
August
Price per
Unit
Cost per Unit
Bulletin Board 400 $3.00 $1.00
Magnetic White Board 600 $4.00 $3.00
Combination Board 250 $5.00 $3.50
3
Exercise 1
What was Stick-It-Up’s total profit in August?
Cost of:
Bulletin Boards 400 x $1.00 $400.00
Magnetic White Boards 600 x $3.00 $1,800.00
Combination Boards 250 x $3.50 $875.00
Total Cost $3,075.00
Profit = Total Revenue - Total Cost = $4,850 - $3,075 = $1,775
Product
Units Sold in
August
Price per
Unit
Cost per Unit
Bulletin Board 400 $3.00 $1.00
Magnetic White Board 600 $4.00 $3.00
Combination Board 250 $5.00 $3.50
Exercise 1
What was Stick-It-Up’s total profit in August?
Profit on:
Bulletin Boards 400 x ($3.00-$1.00) $800.00
Magnetic White Boards 600 x ($4.00-$3.00) $600.00
Combination Boards 250 x ($5.00-$3.50) $375.00
Total Profit $1,775.00
Product
Units Sold in
August
Price per
Unit
Cost per Unit
Bulletin Board 400 $3.00 $1.00
Magnetic White Board 600 $4.00 $3.00
Combination Board 250 $5.00 $3.50
Exercise 1
What product contributed the most to revenue in August? What
percentage did it contribute?
Bulletin Boards $1,200.00
Magnetic White Boards $2,400 ...
Dimitrov Corporation, a company that produces and sells a single p.docx
Dimitrov Corporation, a company that produces and sells a single product, has provided its contribution format income statement for July.
Sales (6,400 units)
$403,200
Variable expenses
275,200
Contribution margin
128,000
Fixed expenses
103,500
Net operating income
$24,500
If the company sells 6,300 units, its net operating income should be closest to:
$24,500
$23,979
$22,500
$20,000
A manufacturer of tiling grout has supplied the following data:
Kilograms produced and sold
370,000
Sales revenue
$1,880,000
Variable manufacturing expense
$953,000
Fixed manufacturing expense
$252,000
Variable selling and administrative expense
$330,000
Fixed selling and administrative expense
$218,000
Net operating income
$127,000
The company's contribution margin ratio is closest to:
49.3%
82.4%
31.8%
75.0%
Data concerning Runnells Corporation's single and sells a product. Data co cerning that product appear below:
Per Unit
Percent of Sales
Selling price
$140
100%
Variable expenses
70
50%
Contribution margin
$ 70
50%
The company is currently selling 5,700 units per month. Fixed expenses are $342,500 per month. The marketing manager believes that a $6,700 increase in the monthly advertising budget would result in a 120 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change?
Decrease of $6,700
Increase of $1,700
Increase of $8,400
Decrease of $1,700
Spartan Systems reported total sales of $365,000, at a price of $20 and per unit variable expenses of $14, for the sales of their single product.
Total
Per Unit
Sales
$365,000
$20
Variable expenses
219,000
14
Contribution margin
146,000
$6
Fixed expenses
113,000
Net operating income
$33,000
What is the amount of contribution margin if sales volume increases by 20%?
$146,000
$39,600
$175,200
$26,400
Lasseter Corporation has provided its contribution format income statement for August. The company produces and sells a single product.
Sales (4,600 units)
$
193,200
Variable expenses
87,400
Contribution margin
105,800
Fixed expenses
45,200
Net operating income
$
60,600
If the company sells 4,700 units, its total contribution margin should be closest to:
$61,917
$105,800
$108,100
$110,000
Darwin Inc. sells a particular textbook for $39. Variable expenses are $28 per book. At the current volume of 49,000 books sold per year the company is just breaking even. Given these data, the annual fixed expenses associated with the textbook total:
$539,000
$1,911,000
$2,450,000
$1,372,000
Puchalla Corporation sells a product for $120 per unit. The product's current sales are 12,300 units and its break-even sales are 10,824 units. The margin of safety as a percentage of sales is closest to:
88%
12%
14%
86%
Alpha Corporation reported the following data for its .
CEE 10.pptx
The document discusses different types of capital cost estimates for chemical processes at various stages of development:
1. Order-of-magnitude estimates based on similar past costs have an accuracy of ±30%.
2. Study estimates based on major equipment knowledge have an accuracy up to ±30%.
3. Preliminary estimates with budgetable data have an accuracy within +20%.
4. Definitive estimates with almost complete data before drawings have an accuracy within ±10%.
5. Detailed estimates based on complete drawings and specs have an accuracy within +5%.
7. Profit Reporting for Managerial Analysis
The document discusses various costing methods and contribution margin analysis techniques used for managerial decision making. It provides examples of calculating income statements and contribution margins under absorption costing and variable costing. It also illustrates how contribution margin analysis can be used to evaluate performance by market segment, product line, salesperson, and route for various companies including a fragrance producer and airline.
CVP Analysis.pptx
* Original variable cost per unit is $45
* New variable cost per unit after equipment purchase is $45 - $5 = $40
* Original fixed costs are $43,750
* New fixed costs after equipment purchase are $48,700
* Selling price remains $80 per unit
* Contribution per unit is selling price - variable cost = $80 - $40 = $40
* Break-even point in units = Fixed costs / Contribution per unit
= $48,700 / $40
= 1,218 units
Therefore, the break-even point in units if Splurge Electronics purchases the new equipment is 1,218 units.
Financial Analysis.pptx
This document defines key financial terms like price, profit, return on investment (ROI), and provides examples of how to calculate operational costs, selling price, total sales, profit, and ROI for a tilapia farming business. Specifically, it calculates the expenses, production cost per kilogram, selling price, sales, and profit for a farm that produced 2,000kg of tilapia. The document also provides a formula for calculating ROI and gives another example to calculate various financial metrics for a hypothetical aquaculture business.
The Cost Of Production - Dealing with Cost - Explicit and Implicit Cost - Eco...
Economics #UCP
What is 'Production Cost'
Production cost refers to the cost incurred by a business when manufacturing a good or providing a service. Production costs include a variety of expenses including, but not limited to, labor, raw materials, consumable manufacturing supplies and general overhead. Additionally, any taxes levied by the government or royalties owed by natural resource extracting companies are also considered production costs.
BREAKING DOWN 'Production Cost'
Also referred to as the cost of production, production costs include expenditures relating to the manufacturing or creation of goods or services. For a cost to qualify as a production cost it must be directly tied to the generation of revenue for the company. Manufacturers experience product costs relating to both the materials required to create an item as well as the labor need to create it. Service industries experience production costs in regards to the labor required to provide the service as well as any materials costs involved in providing the aforementioned service.
In production, there are direct costs and indirect costs. For example, direct costs for manufacturing an automobile are materials such as the plastic and metal materials used as well as the labor required to produce the finished product. Indirect costs include overhead such as rent, administrative salaries or utility expenses.
Deriving Unit Costs for Product Pricing
To figure out the cost of production per unit, the cost of production is divided by the number of units produced. Once the cost per unit is determined, the information can be used to help develop an appropriate sales price for the completed item. In order to break even, the sales price must cover the cost per unit. Amounts above the cost per unit are often seen as profit while amounts below the cost per unit result in losses.
AIA2019 - Rick Rasmussen - Startup Financials
The document provides guidance on building financial projections for startups, including how to model unit economics, variable and fixed costs, and profit and loss statements. It emphasizes the importance of defining the core unit of business and modeling costs, revenues, and key metrics like gross margin and expenses as percentages of revenue. The document uses an example of a custom pen business to demonstrate how to build projections over multiple years to show business growth and potential profitability.
Jiambalvo text book solutions (3)
1. The document discusses the key differences between variable costing and full costing. Under variable costing, fixed manufacturing overhead is treated as a period cost rather than a product cost.
2. When production exceeds sales, variable costing expenses all fixed manufacturing overhead in the period rather than including some in inventory. This means income under variable costing will be lower than under full costing when production is greater than sales.
3. Variable costing facilitates contribution margin analysis and managers cannot artificially inflate profits by overproducing to bury fixed costs in inventory. Inventory balances are also always lower under variable costing compared to full costing.
Analisis Hubungan Biaya, volume, laba
This document discusses cost-volume-profit (CVP) analysis, which estimates how changes in costs and sales volume affect profits. CVP analysis can determine the break-even point, or volume needed to cover total costs. It examines the relationship between a company's costs, sales volume, and profits. The document defines CVP analysis elements like price, volume, variable and fixed costs. It also discusses concepts like contribution margin, break-even analysis, and how CVP can be used to reach profit targets or analyze products.
Risk Analysis and Project Evaluation/Abshor.Marantika/Gita Mutiara Ovelia/3-3
1. Risk analysis is important for project evaluation because project cash flows are risky and may differ from estimates, and forecasts are made by humans who can be optimistic.
2. Sensitivity analysis evaluates the effect of each value driver on NPV and identifies the most impactful variable. Scenario analysis considers simultaneous changes to multiple drivers. Simulation generates thousands of value combinations to model outcomes.
3. Break-even analyses determine the sales or output level needed to cover costs, including accounting, cash, and NPV break-even points.
A manager should always reject a special order ifThe .docx
A manager should always reject a special order if:
The area to the right of the breakeven point and between the total revenue line and the total expense line represents:
The horizontal line intersecting the vertical y-axis at the level of total cost on a CVP graph represents:
The Muffin House produces and sells a variety of muffins. The selling price per dozen is $15, variable costs are $9 per dozen, and total fixed costs are $4,200. How many dozen muffins must The Muffin House sell to breakeven?
Corny and Sweet grows and sells sweet corn at its roadside produce stand. The selling price per dozen is $3.75, variable costs are $1.25 per dozen, and total fixed costs are $750.00. What are breakeven sales in dollars?
Pluto Incorporated provided the following information regarding its single product:
Direct materials used
$240,000
Direct labor incurred
$420,000
Variable manufacturing overhead
$160,000
Fixed manufacturing overhead
$100,000
Variable selling and administrative expenses
$60,000
Fixed selling and administrative expenses
$20,000
The regular selling price for the product is $80. The annual quantity of units produced and sold is 40,000 units (the costs above relate to the 40,000 units production level). The company has excess capacity and regular sales will not be affected by this special order. There was no beginning inventory. What would be the effect on operating income of accepting a special order for 3,500 units at a sale price of $55 per product?
Sky High Seats manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but is currently producing and selling 75,000 seats per year. The following information relates to current production:
Sale price per unit
$400
Variable costs per unit:
$220
Manufacturing
$50
Marketing and administrative
Total fixed costs:
Manufacturing
$750,000
Marketing and administrative
$200,000
If a special sales order is accepted for 7,000 seats at a price of $350 per unit, and fixed costs remain unchanged, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)
The effect of a plant closing on employee morale is an example of which of the following?
If total fixed costs are $455,000, the contribution margin per unit is $25.00, and targeted operating income is $25,000, how many units must be sold to breakeven?
In a special sales order decision, incremental fixed costs that will be incurred if the special order is accepted are considered to be:
In a special sales order decision, incremental fixed costs that will be incurred if the special order is accepted are considered to be:
Samson Incorporated provided the following information regarding its only product:
Sale price per unit
$50.00
Direct materials used
$160,000
Direct labor incurred
$185,000
Variable manufacturing overhead
$120,000
Variable selling and administrative expenses
$70,.
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Income tax
Taxes imposed on the earnings of organizations and individuals are income taxes. Marginal tax rate and flat tax rate. Marginal tax rates are harmful to the economy.
Nominal and Effective Interest Rate
Interest Rate that does not include any consideration of compound interest.Continuous compounding. EAIR.
Interest Why Engineers should know ?
The money returned to the owners of capital for use of their capital.
Compound interest is the result of reinvesting interest, rather than paying it out.
Quotation of interest rates
Projects, Investment, Profitability
This document discusses various methods for evaluating project profitability and investment decisions. It describes quantitative measures like return on investment, return on average investment, payback period, net present worth, and internal rate of return. It also discusses qualitative, intangible factors like employee morale, safety, corporate image, and management goals. The document provides definitions and limitations of different profitability measures. It categorizes project types and notes profitability is difficult to define but important for decision making and maximizing returns on investment.
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Operating labour, allow one extra man on days. It is unlikely
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basic information that should be supplied to a fabricator in order to obtain a price estimate or firm quotation on a proposed heat exchanger (Process Information, Mechanical Information)
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Direct and indirect production cost. Plant overhead costs. Administrative costs. Distribution and marketing costs. Research and development costs
Capital Investment
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Total product are manufacturing cost and general expenses. product costs are calculated on:
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Cost Indices for Industrial Application
Cost Indices, change in cost over time. Cost indexes are maintained in areas such as construction, chemical and mechanical industries. Lang’s method , Hand method.
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Gross Profit, Net Profit
- 1. Gross Profit, Net Profit per Capital Investment Dr. K. Shahzad Baig Memorial University of Newfoundland (MUN) Canada
- 2. Gross Profit, Net Profit and Cash Flow The product sales revenue minus the total product cost gives the gross earnings (gross profit) made by the particular production operation. 𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 = 𝑔𝑗 = 𝑠𝑗 − 𝐶 𝑜𝑗 𝑠𝑗 = Total income from sales in the year j 𝐶 𝑜𝑗 = Total product cost in the year j 𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 = 𝐺𝑗 = 𝑠𝑗 − 𝐶0𝑗 − 𝑑𝑗 𝑑𝑗 Depreciation in the year j Net Profit is the amount retained of the profit after income taxes have been paid 𝑁𝑝𝑗 = 𝐺𝑗 1 − ∅ ∅ = fractional income tax rate Cash flow from the the processes and operations 𝐴𝑗 = 𝑁𝑝𝑗 + 𝑑𝑗
- 3. Example Break-even point, gross earnings, and net profit for a process plant The annual variable production costs for a plant operating at 70 percent capacity are $280,000 while the sum of the annual fixed charges, overhead costs, and general expenses is $200,000. What is the break-even point in units of production per year if total annual sales are $560,000 and the product sells at $4 per unit? What is the breakeven point in kgs of product /year? What are the gross annual profit Gj and net annual profit for this plant at 100 % capacity if the income tax rate is 35 % of gross profit?
- 4. Solution The break-even point occurs when the total annual product cost equals the total annual sales. The total annual product cost is the sum of the fixed costs (including fIxed charges, overhead, and general expenses) and the direct production costs for n units per year. The total annual sales is the product of the number of units and the selling price per unit. 𝐷𝑖𝑟𝑒𝑐𝑡 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑐𝑜𝑠𝑡 𝑘𝑔 = $280,000 $560,000 / $4/𝑘𝑔 = $2/𝑘𝑔 the number of units needed for a break-even point is given by = 200,000 + $2 kg/year = $4 kg/yr 𝑘𝑔 𝑦𝑒𝑎𝑟 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 = 100,000
- 5. Gross annual earnings = total annual sales - total annual product cost Annual capacity is $560,000 $4/𝑘𝑔 0.70 = 200,000 𝑘𝑔 𝐵𝑟𝑒𝑎𝑘𝑒𝑣𝑒𝑛 𝑝𝑜𝑖𝑛𝑡 = 100000 200000 100 = 50% 𝑜𝑓 𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝐺𝑗 = $4/𝑘𝑔 200000 − $200,00 + 200,000 𝑘𝑔 $2/𝑘𝑔 = $200,000 Annual net profit = $200000- (0.35) ( $20000) Npj = $ 130, 000
- 6. Following books were used in preparation of notes Blank, L., Tarquin. A. 2005. Engineering Economy. 6th Edition, McGraw-Hill. Eschenbach, T. G. 2003. Engineering Economy”, 2nd Edition, Oxford University Press Riggs, J. L., Bedworth, D. D., Randhawa, S. U. 1996. Engineering Economics”, 4th Edition, Tata McGraw-Hill. Riggs, J. L., West. T. M. 1986. Essentials of Engineering Economics”, 2nd Edition, McGraw-Hill. Peter, M. S., Timmerhaus, K. D. 1991. Plant Design and Economics for Chemical Engineers. 4th Edition,