What is the Operating Profit Formula?

The operating profit formula measures the company’s efficiency in running its business by calculating the operating profit. Operating profit is the profit generated from the core business after deducting all the related operating expenses, depreciation, and amortization from its revenue before deducting interest and taxes. Also, operating profit does not include profits earned by the company from its ancillary investments.

The term “operating profit formula” refers to the formula used to calculate the operating profit earned by the company. The formula for calculation of the operating profit is mathematically represented as below:

Here,

  • Revenue from core operations is the total value of the amount earned by the company from the sale of the goods or provision of the services with respect to the core business operations.Cost of the Goods Sold is the total cost incurred by the company for creating the goods or services. It includes the cost of material, labor, and overheads.Operating Expenses are the expenses incurred by the company with respect to its normal business operation, excluding the cost of goods sold.Depreciation is the reduction value of an asset due to normal nature wear and tear.Amortization is the amount of reduction in the value of the loan or of the intangible assetsIntangible AssetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can’t touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. read more during the period.

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Explanation of Operating Profit Formula

The equation for operating profit can be derived by using the following steps:

Step 1: Firstly, determine the revenue earned by the company from the core business operations. For this, all the amount earned by the company from the sale of the goods or provision of the services concerning the core business operations is added together.

Step 2: After that, the cost of the goods sold by the company during that period is calculated by adding the total cost incurred on the material, labor, and the overheads of the company altogether.

Step 3: Calculate the total operating expenses incurred by the company during the year. Also, determine the total depreciation and amortization expense of the period.

Step 4: Finally, Operating profit will be calculated by deducting values in steps 2 and 3 from step 1 values. The equation for operating profit is expressed, as shown below.

Examples of Operating Profit Formula (with Excel Template)

To understand them better, let’s see some simple to advanced examples of operating profit equations.

Operating Profit Formula Example #1

Let us take the example of the company having a total revenue earned during the year of $5,000,000. The cost of the goods sold and operating expenses during the year are $ 2,000,000 and 1,000,000, respectively, and the depreciation on assets is $50,000. What is the operating profit of the company?

Solution:

Use the given data for the calculation of operating profit.

Calculation of Operating profit can be done as follows:

Operating Profit = $5,000,000 – $2,000,000 – $1,000,000 – $500,000

Operating Profit will be –

Operating Profit = $1,500,000

Therefore, the operating profit of the company for the year is $1,500,000.

Operating Profit Formula Example #2

Let us take another example of a company which is having the following information for the year 2018:

  • Revenues from core business operations: $81,000,000Revenues from non-core business operations: $5,000,000Cost of goods sold: $35,000,000Selling, general and the administrative expenses: $10,000,000Depreciation expenses for the period: $1,000,000Amortization expenses for the period: $500,000Interest Expenses: $1,000,000Taxes expenses for the year: $3,000,000

From the information provided, what is the total amount of operating profit of the company for 2018?

  • Revenue from core operations is $81,000,000, and the revenue from the non-core operation will not be taken as they are not considered while calculating the operating profit.Selling, general, and the administrative expensesAdministrative ExpensesAdministrative expenses are indirect costs incurred by a business that are not directly related to the manufacturing, production, or sale of goods or services provided, but are necessary for the smooth functioning of business operations, such as information technology, finance & accounts.read more will be part of the operating expenses of the company and hence will be considered while calculating the operating profit.Lastly, Operating profit is calculated before deducting the expenses related to interest and taxes. So, they will not be considered while calculating the operating profit.

Operating Profit = $81,000,000 – $35,000,000 – $10,000,000 – $1,000,000 – $500,000

Operating Profit = $34,500,000

Therefore, the operating profit of the company for the year is $34,500,000.

Operating Profit Formula Example #3

Let us take another example of a company AB. The management of the company wants to know the operating profit earned by the company for a year having the following information:

  • Revenues from core business operations:Business Operations:Business operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company’s goals like profit generation.read more $1,000,000Cost of direct material:Cost Of Direct Material:Direct Material Cost is the total cost incurred by the company in purchasing the raw material along with the cost of other components including packaging, freight and storage costs, taxes, etc. that are related directly to the manufacturing and production of various products of the company.read more $300,000Cost of direct Labour: $200,000Cost of direct material: $100,000Operating expenses: $100,000Depreciation expenses for the period: $50,000Amortization expenses for the period: $10,000

From the information provided, what is the total amount of operating profit of the company for the year?

  • The cost of goods sold will be calculated by adding the cost of direct material, cost of direct labor, and cost of direct overhead.

Calculation of Cost of the Goods Sold will be:

Cost of the Goods Sold = $300,000 + $200,000 + $100,000

Cost of the Goods Sold = $600,000

Now,

Calculation of operating profit can be done as follows:

Operating Profit = $1,000,000 – $600,000 – $100,000 – $50,000 – $10,000

Operating Profit = $240,000

Therefore, the operating profit of the company for the year is $240,000.

Operating Profit Formula Calculator

You can use this operating profit formula calculator.

Relevance and Uses

The operating profit equation shows light on the success of the company. This is because it measures how efficient the company is in controlling its costs and earning profits. Also, it is one of the simple as well as the standard ratio that tells about the company’s performance from one period to another as well as concerning the other companies thereby enabling the comparative analysis.

This article has been a guide to the operating profit formula. Here we discuss how to calculate operating profit using its formula, examples, and downloadable excel template. You can learn more about financial analysis from the following articles –

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