Operating Profit Formula

What is Operating Profit Formula?

Operating profit formula measures the efficiency of the company to run its business by calculating the operating profit of the company. Operating profit is the profit generated from the core business after deducting all the related operating expenses, depreciation, and amortization from its revenue but 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 which is used as the measure for calculation operating profit earned by the company. The formula for calculation of the operating profit is mathematically represented as below:

Operating Profit Formula = Revenue from Core Operations – Total Cost of Goods Sold Value – Operating Expenses – Depreciation Expenses – Amortization Expenses

Here,

Operating-Profit-Formula

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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 with respect to 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 amount of 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 value arrived in steps 2 and 3 from step 1 values. The equation for operating profit is expressed, as shown below.

Operating Profit = Revenue from Core Operations – Cost of Goods Sold – Operating Expenses – Depreciation – Amortization Expenses

Examples of Operating Profit Formula (with Excel Template)

Let’s see some simple to advanced examples of operating profit equation to understand it better.

You can download this Operating Profit Formula Excel Template here – Operating Profit Formula Excel Template

Operating Profit Formula Example #1

Let us take the example of the company having the 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.

Operating Profit Formula Example 1

Calculation of Operating profit can be done as follows:

Operating Profit Formula Example 1.1.0

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

Operating Profit will be –

Operating Profit Formula Example 1.2

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

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

Solution:

Use the given data for the calculation of operating profit.

Example 2

Here,

Operating Profit Formula Example 2.1

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

Operating Profit will be –

Example 2.2

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:

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

Solution:

Use the given data for the calculation of operating profit.

Operating Profit Formula Example 3

Here,

  • 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 = Cost of Direct Material + Cost of Direct Labour + Cost of Direct Overhead
Example 3.1

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 Formula Example 3.2

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

Operating Profit will be –

Example 3.3

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.

Revenue from Core Operations
Total Cost of Goods Sold Value
Operating Expenses
Depreciation Expenses
Amortization Expenses
Operating Profit Formula
 

Operating Profit Formula = Revenue from Core Operations - Total Cost of Goods Sold Value - Operating Expenses - Depreciation Expenses - Amortization Expenses
0 - 0 - 0 - 0 - 0 = 0

Relevance and Uses

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

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

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