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Operations Management Formulas
Explaining Formulas Term
Profitability and Financial Formulas
Explaining Formulas Term
Business Case
100

Total Cost = 

Fixed Costs + Variable Costs

100

The definition of Fixed Costs

Costs that stay the same no matter how much you produce / Costs that do not change with output 

100

Current Ratio =

Current Assets / Current Liabilities

100

The definition of Current Ratio

Measures if a business can pay its short-term debts.

100

No. of Employees = 50

Output of Sweets = 35000

Calculate the Labour Productivity

  • Total output = 35,000 sweets
  • Number of employees = 50

👉 Each worker produces 700 sweets

200

Labour Productivity =

Output / No. of Employees

200

The definition of Gross Profit 

Gross Profit = Revenue – Cost of Goods Sold (COGS), Profit made after covering direct production costs only.

200

Inventory Turnover =

Cost of Sales / Average Inventory

200

The definition of Inventory Turnover 

How many times inventory is sold and replaced in a period.

200

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

  • Material cost = $2
  • Shipping cost = $0.5
    👉 Variable cost per unit = 2 + 0.5 = $2.5
  • Total variable cost = 2.5 × 500 = $1250
  • Salaries = $2500
  • Rent = $4000
    👉 Total fixed costs = 2500 + 4000 = $6500
  • 👉Total Cost = Fixed Costs + Variable Costs
    = 6500 + 1250 = $7750
300

Variable Costs =

Cost per unit x Quantity

300

The definition of Markup 

(Profit / Cost) × 100 or How much a business adds to cost to set the selling price.

300

Capital Employed =

Total Assets - Current Liabilities

300
The definition of Capital Employed

The total long-term funds used or invested in the business for paying the assets.

300

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

400

Revenue (Sales)=

Selling Price x Quantity Sold

400

The definition of Net Profit 

Revenue – Total Costs or The final profit after all costs are paid.

400

Expense Ratio =

(Expenses / Revenue) x 100

400

The definition of Expense Ratio 

Shows how much of the revenue is used to cover expenses.

400

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:

  • Salaries: $400,000
  • Rent: $250,000
  • Utilities: $150,000

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

500

Break-even Output =

Fixed Costs / (Selling Price per unit - Variable Cost per unit)

500

The definition of Break-even Revenue 

Break-even Output × Selling Price or the amount of sales money needed to break even.

500

Return on Capital Employed (ROCE) =

(Net Profit / Capital Employed) x 100

500

The definition of Return on Capital Employed (ROCE) 

Shows how well the business is using its money to generate profit.

500

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:

  • Total assets: $1,200,000
  • Current liabilities: $300,000
  • Net profit: $180,000

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%