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Gross Profit, Net Profit
per Capital Investment
Dr. K. Shahzad Baig
Memorial University of Newfoundland (MUN)
Canada
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.
๐บ๐‘Ÿ๐‘œ๐‘ ๐‘  ๐‘๐‘Ÿ๐‘œ๐‘“๐‘–๐‘ก = ๐‘”๐‘— = ๐‘ ๐‘— โˆ’ ๐ถ ๐‘œ๐‘—
๐‘ ๐‘— = Total income from sales in the year j
๐ถ ๐‘œ๐‘— = Total product cost in the year j
๐บ๐‘Ÿ๐‘œ๐‘ ๐‘  ๐‘๐‘Ÿ๐‘œ๐‘“๐‘–๐‘ก = ๐บ๐‘— = ๐‘ ๐‘— โˆ’ ๐ถ0๐‘— โˆ’ ๐‘‘๐‘—
๐‘‘๐‘— Depreciation in the year j
Net Profit is the amount retained of the profit after income taxes have been paid
๐‘๐‘๐‘— = ๐บ๐‘— 1 โˆ’ โˆ…
โˆ… = fractional income tax rate
Cash flow from the the processes and operations
๐ด๐‘— = ๐‘๐‘๐‘— + ๐‘‘๐‘—
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?
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.
๐ท๐‘–๐‘Ÿ๐‘’๐‘๐‘ก ๐‘๐‘Ÿ๐‘œ๐‘‘๐‘ข๐‘๐‘ก๐‘–๐‘œ๐‘›
๐‘๐‘œ๐‘ ๐‘ก
๐‘˜๐‘”
=
$280,000
$560,000 / $4/๐‘˜๐‘”
= $2/๐‘˜๐‘”
the number of units needed for a break-even point is given by
= 200,000 + $2 kg/year = $4 kg/yr
๐‘˜๐‘”
๐‘ฆ๐‘’๐‘Ž๐‘Ÿ
๐‘Ÿ๐‘’๐‘ž๐‘ข๐‘–๐‘Ÿ๐‘’๐‘‘ = 100,000
Gross annual earnings = total annual sales - total annual product cost
Annual capacity is
$560,000
$4/๐‘˜๐‘” 0.70
= 200,000 ๐‘˜๐‘”
๐ต๐‘Ÿ๐‘’๐‘Ž๐‘˜๐‘’๐‘ฃ๐‘’๐‘› ๐‘๐‘œ๐‘–๐‘›๐‘ก =
100000
200000
100 = 50% ๐‘œ๐‘“ ๐‘๐‘Ž๐‘๐‘Ž๐‘๐‘–๐‘ก๐‘ฆ
๐บ๐‘— = $4/๐‘˜๐‘” 200000 โˆ’ $200,00 + 200,000 ๐‘˜๐‘” $2/๐‘˜๐‘”
= $200,000
Annual net profit = $200000- (0.35) ( $20000)
Npj = $ 130, 000
Following books were used in preparation of notes
๏‚ท Blank, L., Tarquin. A. 2005. Engineering Economy. 6th Edition, McGraw-Hill.
๏‚ท Eschenbach, T. G. 2003. Engineering Economyโ€, 2nd Edition, Oxford University Press
๏‚ท Riggs, J. L., Bedworth, D. D., Randhawa, S. U. 1996. Engineering Economicsโ€, 4th Edition, Tata McGraw-Hill.
๏‚ท Riggs, J. L., West. T. M. 1986. Essentials of Engineering Economicsโ€, 2nd Edition, McGraw-Hill.
๏‚ท Peter, M. S., Timmerhaus, K. D. 1991. Plant Design and Economics for Chemical Engineers. 4th Edition,

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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. ๐บ๐‘Ÿ๐‘œ๐‘ ๐‘  ๐‘๐‘Ÿ๐‘œ๐‘“๐‘–๐‘ก = ๐‘”๐‘— = ๐‘ ๐‘— โˆ’ ๐ถ ๐‘œ๐‘— ๐‘ ๐‘— = Total income from sales in the year j ๐ถ ๐‘œ๐‘— = Total product cost in the year j ๐บ๐‘Ÿ๐‘œ๐‘ ๐‘  ๐‘๐‘Ÿ๐‘œ๐‘“๐‘–๐‘ก = ๐บ๐‘— = ๐‘ ๐‘— โˆ’ ๐ถ0๐‘— โˆ’ ๐‘‘๐‘— ๐‘‘๐‘— Depreciation in the year j Net Profit is the amount retained of the profit after income taxes have been paid ๐‘๐‘๐‘— = ๐บ๐‘— 1 โˆ’ โˆ… โˆ… = fractional income tax rate Cash flow from the the processes and operations ๐ด๐‘— = ๐‘๐‘๐‘— + ๐‘‘๐‘—
  • 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. ๐ท๐‘–๐‘Ÿ๐‘’๐‘๐‘ก ๐‘๐‘Ÿ๐‘œ๐‘‘๐‘ข๐‘๐‘ก๐‘–๐‘œ๐‘› ๐‘๐‘œ๐‘ ๐‘ก ๐‘˜๐‘” = $280,000 $560,000 / $4/๐‘˜๐‘” = $2/๐‘˜๐‘” the number of units needed for a break-even point is given by = 200,000 + $2 kg/year = $4 kg/yr ๐‘˜๐‘” ๐‘ฆ๐‘’๐‘Ž๐‘Ÿ ๐‘Ÿ๐‘’๐‘ž๐‘ข๐‘–๐‘Ÿ๐‘’๐‘‘ = 100,000
  • 5. Gross annual earnings = total annual sales - total annual product cost Annual capacity is $560,000 $4/๐‘˜๐‘” 0.70 = 200,000 ๐‘˜๐‘” ๐ต๐‘Ÿ๐‘’๐‘Ž๐‘˜๐‘’๐‘ฃ๐‘’๐‘› ๐‘๐‘œ๐‘–๐‘›๐‘ก = 100000 200000 100 = 50% ๐‘œ๐‘“ ๐‘๐‘Ž๐‘๐‘Ž๐‘๐‘–๐‘ก๐‘ฆ ๐บ๐‘— = $4/๐‘˜๐‘” 200000 โˆ’ $200,00 + 200,000 ๐‘˜๐‘” $2/๐‘˜๐‘” = $200,000 Annual net profit = $200000- (0.35) ( $20000) Npj = $ 130, 000
  • 6. Following books were used in preparation of notes ๏‚ท Blank, L., Tarquin. A. 2005. Engineering Economy. 6th Edition, McGraw-Hill. ๏‚ท Eschenbach, T. G. 2003. Engineering Economyโ€, 2nd Edition, Oxford University Press ๏‚ท Riggs, J. L., Bedworth, D. D., Randhawa, S. U. 1996. Engineering Economicsโ€, 4th Edition, Tata McGraw-Hill. ๏‚ท Riggs, J. L., West. T. M. 1986. Essentials of Engineering Economicsโ€, 2nd Edition, McGraw-Hill. ๏‚ท Peter, M. S., Timmerhaus, K. D. 1991. Plant Design and Economics for Chemical Engineers. 4th Edition,