Operations Management Formulas
Total Cost =
Fixed Costs + Variable Costs
The definition of Fixed Costs
Costs that stay the same no matter how much you produce / Costs that do not change with output
Current Ratio =
Current Assets / Current Liabilities
The definition of Current Ratio
Measures if a business can pay its short-term debts.
No. of Employees = 50
Output of Sweets = 35000
Calculate the Labour Productivity
👉 Each worker produces 700 sweets
Labour Productivity =
Output / No. of Employees
The definition of Gross Profit
Gross Profit = Revenue – Cost of Goods Sold (COGS), Profit made after covering direct production costs only.
Inventory Turnover =
Cost of Sales / Average Inventory
The definition of Inventory Turnover
How many times inventory is sold and replaced in a period.
Material Cost = $2 per unit
Shipping Cost = $0.5 per unit
Salaries per month = $2500
Rent cost per month = $4000
Production per month = 500
Calculate the Total Cost
Variable Costs =
Cost per unit x Quantity
The definition of Markup
(Profit / Cost) × 100 or How much a business adds to cost to set the selling price.
Capital Employed =
Total Assets - Current Liabilities
The total long-term funds used or invested in the business for paying the assets.
AI International sold 40,000 units at an average selling price of $240 per unit. If each unit cost AI Internatinal $200 to make.
Calculate the business Gross Profit
Revenue = Price × Quantity
= 240 × 40,000 = $9,600,000
COGS = Cost per unit × Quantity
= 200 × 40,000 = $8,000,000
Gross Profit = Revenue – Cost of Goods Sold
= 9,600,000 – 8,000,000 = $1,600,000
Revenue (Sales)=
Selling Price x Quantity Sold
The definition of Net Profit
Revenue – Total Costs or The final profit after all costs are paid.
Expense Ratio =
(Expenses / Revenue) x 100
The definition of Expense Ratio
Shows how much of the revenue is used to cover expenses.
A company sold 25,000 units at an average selling price of $180 per unit. Each unit costs $120 to produce.
The business also has the following expenses:
Calculate the net profit of the business.
1. Revenue
= 180 × 25,000 = $4,500,000
2. Cost of Goods Sold (COGS)
= 120 × 25,000 = $3,000,000
3. Gross Profit
= 4,500,000 – 3,000,000 = $1,500,000
4. Total Expenses
= 400,000 + 250,000 + 150,000 = $800,000
5. Net Profit
= 1,500,000 – 800,000 = $700,000
Break-even Output =
Fixed Costs / (Selling Price per unit - Variable Cost per unit)
The definition of Break-even Revenue
Break-even Output × Selling Price or the amount of sales money needed to break even.
Return on Capital Employed (ROCE) =
(Net Profit / Capital Employed) x 100
The definition of Return on Capital Employed (ROCE)
Shows how well the business is using its money to generate profit.
FreshBite Ltd is a food manufacturing company. The owner wants to evaluate how efficiently the business is using its capital.
The following financial information is available:
Calculate the Return on Capital Employed (ROCE)
Capital Employed
= Total Assets – Current Liabilities
= 1,200,000 – 300,000
= $900,000
ROCE
= (Net Profit / Capital Employed) × 100
= (180,000 / 900,000) × 100
= 20%