Practical Module Exercise
Learning Object 4, Module 6
Example
A company is producing and selling several products for a
gross (income) of 2.15 million dollars(in 1993). Returns
and allowances are 3 percent of the gross sales, reducing
the income to net sales. Marketing, management, and
general expenses (MM&G) are figured to be 20 percent of
the net sales. Cost of goods sold is the sum of labour
($325,000), materials ($600,000) and overheads.
Overhead is figured to be 30 percent of the combined cost
of labour and materials plus $70,000.
Gross profit is the difference between net sales and the
cost of goods sold. To figure the profit before tax, the
MM&G expenses need to be subtracted from the gross
profit. Finally, there is a 28 percent Federal tax and 7
percent state tax that needs to be considered.
Example
Model for five year projection (1994-
1998);
–
gross sales increase 6% per year,
–
labour costs increase 5% per year,
–
material costs increase 7% per year,
–
fixed overheads increase $10,000 per
year.
This forms the base case.