30.  +Explain+how+to+analyze+fixed+operating+costs+and+calculate+gross+profit.

30. Explain how to analyze fixed operating costs and calculate gross profit.

Fixed Operating Expenses/ Costs: Fixed expenses are business expenses that generally remain somewhat consistent from month to month. They are not normally affected by the daily business activities such as sales and production activities. Since fixed expenses remain consistent, they are normally separated from other types of expenditures on the income statement Examples of Fixed Expenses • Rent • Utilities • Insurance • Salaries Analyzing Operating Expense from the Income Statement Since fixed expenses remain consistent, there’s not as much need to analyze them. Since operating expenses fluctuate along with business activities, they should be analyzed from the income statement to make sure they align with profits. One important ratio to analyze is the variable expense to gross profit ratio. Simply divide the total gross profit into each individual operating expense. To ensure that variable expenditures aren’t increasing in relationship to gross profit, the current months percentage should be compared to a 12-month average percentage. If a trend is developing, where the percentage is increasing, further analysis should be undertaken to find the root cause. Once the root cause is determined, immediate action should be taken to correct the negative affect to net profits. Gross Profit/ Margin: The gross profit margin is a measurement of a company's manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue / sales left after subtracting the cost of goods sold. A company that boasts a higher gross profit margin than its competitors and industry is more efficient. To calculate gross profit margin, use this formula: Gross Profit ÷ Total Revenue The gross profit margin percentage, sometimes known as the ratio, is figured by dividing sales into the total gross profit amount. Below is an example of gross profit and margin calculation: • Sales $1,00,000 • Less cost of goods sold $720,000 • Plus other income $20,000 • Equal gross profit $300,000 30% Gross profit margin = Gross Profit/Sales
 * || [|1jsamuel] Oct 10, 2011 7:53 pm

By Josh Samuel and George Heller ||