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Entrepreneurship
Quarter 2 – Module 8
Computation of Gross
Profit

This instructional material was collaboratively developed and

reviewed by educators from public and private schools, colleges, and
universities. We encourage teachers and other education stake
holders to email there feedback, comments, and recommendations to
the Department of Education at action @deped.gov.ph

We value your feedback and recommendations.

Department of Education ● Republic of the Philippine

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What I Need to Know

As we all know that profit is a financial gain from a transaction or from a

period of investment or business activity, usually calculated as income in excess of
costs or as the final value of an asset in excess of its initial value.

It is a total revenue minus total expenses, profit is the amount of money a

business "makes" during a given accounting period. The more profit you make, the
better, as profit can be re-invested into the business or retained by the business
owners. Being able to accurately determine your business's profit is an essential part
of being able to judge its financial health. It can also help you decide how to price
your goods and services, how to pay your employees, and more.

To make your business gain more profit, begin by adding up all of the money
your business has made in a set period of time (either, quarterly, yearly, monthly,
etc. Other sources, like products sold, services rendered, membership payments, or,
in the case of government agencies, taxes, fees, the sales of resource rights, and so
on.

Note that you will need to subtract any amount of cash refunded to customers
for returns or disputes in order to find an accurate figure for your total income.

It's easier to understand the process of calculating a business's profit by

following along with an example.

Let's say that we own a small publishing business. In the last month, we sold
P20,000 worth of books to retailers in the area. However, we also sold the rights to
one of our intellectual properties for P7,000 and received P3,000 from book retailers
for official promotional materials. If these represent all of our revenue sources, we
can say that our total income is P20,000 + P7,000 + P3,000 = P30,000.
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This module is divided into two lessons:

Lesson 1 – Compute for profits CS_EP11/12ENTREP-0h-j-16

Create the company’s five (5) year projected financial statements
-CS_EP11/12ENTREP-0h-j-17

To be able to successfully complete this module, previous knowledge in

adding & multiplying numbers will best help.
After carefully studying the contents of this module, you should be able to:
• compute for profits
• define profitability, liquidity & solvency
• identify commonly used profitability ratios.

What I Know

Let us see what you already know about forecasting revenues and costs.
Answer the questions below.

Write True if the statement is correct & write False if you think the answer is not
correct.
_________1. The gross profit rate of the entrepreneurial venture is computed by
dividing the cost of goods sold by net sales.
_________ 2. The gross profit rate provides information on the cost ratio of the
business.
_________3. In evaluating the profitability of the entrepreneurial venture the
evaluation must focus on the information reflected on the face of the
balance sheet.
_________4. The operating profit margin rate indicates information on the
percentage of operating expenses on the net sales.
_________5. Mr. Q is a practicing Doctor of Medicine. During the month of March
2019 he received Professional Fees amounting to P 1,000,000 and
total expenses of P250,000. The net income of Mr. Q is P 750,000.
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__________6. Profit is the money received from customer in exchange of
products given to customer.
_________ 7. The gross profit rate of the entrepreneurial venture is computed by
dividing the cost of goods sold by net sales.
_________ 8. The gross profit rate provides information on the cost ratio of
business.
_________ 9. One of the objectives in evaluating the gross profit rate of the
business is to determine whether the amount of the gross profit is
sufficient to cover the operating expenses.
__________10. The operating profit margin rate indicates information on the
percentage of operating expenses to net sales.
__________11 The government is not interested in financial statements since it is
not a party to any of the transactions of the business.
__________12. The net profit margin rate presents the general perspective of the
operating performance of the business.
__________13. The amount of income per peso investment can be determined by
computing the net profit margin rate.
__________14.In normal situation, it is favorable for the business to have high
inventory
__________15. Preparation & presentation of the financial statements of the entity is
the primary responsibility of an accountant.
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Lesson
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Computation of Gross Profit

1

What’s In

Let’s review of what is revenue of the business. This is an important tool and
materials needed in the operation of the business. It is said that revenue is the result
when sales exceed the cost to produce or manufacture goods/merchandise as well
as costs incurred in selling.

Forecast is advance information that could help us prepare and ready for any
incoming event. Forecasting is the tool used in planning that aims to support
management or a business owner in its desire to adjust and cope up with
uncertainties of the future. If anyone of us can predict that we can be rich so it
means all of us will be rich. This fantasy is played out every day in boardrooms
across the globe with the practice of business forecasting.

It is important to have a good organization in the business to easily grow and

expand in the future.

What’s New

Activity 1
Read and understand the given problem.

Rodrigo is engaged in a buy-and sell business of perfumes. He bought 10

boxes of perfumes. Each box costs 12,000.00 and contains a dozen of perfume
bottles. He is planning to sell one perfume bottle at P1,500. What is his expected
profit on the 10 boxes of perfumes?
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The ultimate goal of any business whether a retail or wholesale is to earn a
profit. Getting the difference between the amount of money earned from the selling
10 boxes containing a dozen of perfume bottles and the cost of those 10 boxes gives
the profit.

In the example that I gave, answer the following questions:

1. How much does Rodrigo earned profit?
2. Is it good to engage in a business? Yes or No?
3. What do you think of Rodrigo’s business? Is it good for a beginner?

What Is It

Compute the Gross Profit

The profitability ratios are a group of financial statement that primarily

determine the profitability of the business operation.
The gross profit rate on a product is computed as:
Net Sales xxxxxxx
Less: Cost of sales xxxxxxx
Gross profit xxxxxxx

By using the formula , the gross of XYZ Trading in the year 2017
Net Sales P 734, 000.00
Less: Cost of Sales 577, 000.00
Gross Profit 157, 000.00

Profit is the gross income. The amount of gross profit provides information to
the entrepreneur about revenue earned from sales.

The term cost refers to the purchase price of the product including of the
product including the total outlay required in producing it.
The gross profit margin is computed as follows:
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The gross profit rate measures the percentage of gross profit to sales,
indicating the profit that the business realizes from the sale of the product.

The gross profit rate of XYZ Trading for the year computed as follows:

The gross profit rate may signal to the entrepreneur that the amount of margin
on sales is 21.39%. This rate will be used to determine whether the amount of gross
profit can cover the operating of the business. Since the gross profit rate of XYZ
Trading is 21.39%, the cost ratio to sales will be 78.61%. This information will help
the entrepreneur in assessing whether the cost is too high or too low. Any product
with a very high cost will not become competitive in the market.

The gross profit rate will also help the entrepreneur set the selling price.

Operating Profit Margin Rate

The operating the profit margin is the excess of gross profit from operating
expenses.
Gross profit xxxxx
Less: Operating Expenses xxxxx
Operating profit margin xxxxx

The operating profit margin is the second level of revenue in the income
statement. At this stage, not only the cost of buying or making the product that has
been deducted is included but also the operating expenses. These are expenses
incurred during a particular period only, and are not expected to provide benefits to
any future period. The operating expenses are also period costs.

In case there are no financing charges like interest, expenses, and income
tax, the amount of the operating profit margin is equal to the net income .
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Gross profit P 157,000.00
Less: Operating expenses 90,000.00
Operating profit margin P 67,000.00

This information that the business realized an income of P 67,000.00 during

the year after deducting the cost and operating expenses from the sales made.

By applying

The operating profit margin of the business measures the percentage of profit
available after deducting the cost of sales & operating expenses of the business. A

higher operating profit margin is favorable to the business .

Net Profit Margin Rate

Operating profit margin xxxxxxx

Add: Interest Income xxxxxxx
Total
Less: Interest Expense xxxxxx
Income Tax xxxxxx xxxxxx
Net Profit margin xxxxxx

The Income statement.is the net profit margin & the third level in the revenue.
The business is only given consideration like interest expense and income tax.
Operating profit margin P67,000.00
Less: Income tax 20,000.00
Net profit margin P46,900.00
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The income statement of XYZ Trading does not reflect any data on interest
expense. Only income tax has been deducted from the operating profit margin.

By applying the formula the profit margin of XYZ

XYZ Trading appears to have earned 6.39% of its total sales of P734,000
during the year. This profits rate must be compared with those of other similar
businesses within the industry.

Analyse the Liquidity Status of the Business

Liquidity Ratios

Current ratio = Current assets / Current liabilities

Quick ratio =(Current assets – Inventories) / Current liabilities
= (Cash and equivalents + Marketable securities + Accounts
receivable) / Current liabilities

The quick ratio measures its short-term obligations with its most liquid assets
and therefore excludes inventories from its current assets.

. Financial statements are important in a company management as a means of

communicating past successes as well as future expectations. The financial
statement records all the operating results such as sales, expenses and profits or
losses.
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Return of Investment (ROI)

The Return of investment (ROI) measures the amount of net income per
peso invested to the business.

The formula to compute ROI is as follows

The average total assets are by dividing the sum of the total assets at the
beginning and end of the period.

Table 1

Projected Five Year Balance Sheet

Fit Mo'to Ready to Wear Online Selling Business

Year 1 Year 2 Year 3 Year 4 Year 5

ASSET
Cash
337,398.56 686,417.05 1,052,886.47 1,437,679.36 1,841,711.89
Total Assets
337,398.56 686,417.05 1,052,886.47 1,437,679.36 1,841,711.89

Liability - - - - -
Owners’
equity 337,398.56 686,417.05 1,052,886.47 1,437,679.36 1,841,711.89
Total
Liabilities
and Owner's
Equity 337,398.56 686,417.05 1,052,886.47 1,437,679.36 1,841,711.89
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Table 1
Projected Five Year Income Statement
Fit Mo'to Ready to Wear Online Selling Business
Year 1 Year 2 Year 3 Year 4 Year 5

Revenue 1,545,673.95 1,622,957.64 1,704,105.53 1,789,310.80 1,878,776.34

Cost 1,213,275.38 1,273,939.15 1,337,636.11 1,404,517.91 1,474,743.81

Gross Profit
Before tax 332,398.56 349,018.49 366,469.42 384,792.89 404,032.53

Yearly increase in revenue is assumed at 5%

Yearly increase in cost is assumed at 5%

As a future entreprenuer, one should always remember that nothing is

permanent in the field of entreprenuership. What is applicable to one entreprenuer
may not be applicable to another. Certain things may happen to one entrepreneur
but may not happen to another.

Entreprenuership should be practiced not as a science but as an art.

Creativity should always be applied to entrepreneur by regularly evaluating the
market and the environment and responding to the changes in them.

The owner of an ordinary small business has the freedom to manage and
operate. Ideally he/she prefers business activities which are done easily. However,
the entrepreneur has to perform the entrepreneurial activities correctly regardless of
whether they are undertaken easily or not. The important in entrepreneurship is that
the business activities are performed correctly.
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What’s More

Compute the Gross Profit

Answer the given problem.

1. Annie bought one dozen smartphones for P200,000.00 with a discount of 5%.
She sold half dozen at a price of P18,000.00 per unit. However, a new model
of smartphone became available in the market, so she sold the remaining half
dozen @ P12,000.00 each unit. What was her profit or loss?

Compute the following requirements:

a. Gross profit rate
b. Operating profit margin rate
c. Net profit margin rate
d. Return on Investment

Now ask yourself the following questions:

1. Is creativity present in the operation of ordinary small businesses along

the streets and highways and in your neighborhood? Why do you say
so?

__________________________________________________________________
__________________________________________________________________
__________________________________________________________________

2. Will you consider the daily business practices of the small owner within
the concept of entrepprenuership? Why?

___________________________________________________________
___________________________________________________________
___________________________________________________________
___________________________________________________________
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What I Have Learned

The profitability and ratios are a group financial statement ratios that primarily
determine the profitabilty of the business operation. They provide information on the
efficiency of resource utilization.

The gross profit represents the difference between net sales and cost of sales
of the entrepreneurial venture during a given period. It is computed as follows:

Net Sales xxxxxx

Less: Cost of Sales xxxxxx
Gross Profit xxxxxx

By using the formula, the gross profit of XYZ Co., in the year 2017 is
computed as follows :
Net Sales P734,000.00
Less: Cost of Sales 577,000.00
Gross profit P 157,000.00

Profit is determined by:

• the money you get from sales
• the cost of stock – if you're selling a product
• all the expenses you incurred
Income earned by the business are sales & gross profit. Commissions,
discounts , fixed expense are business expenses.

How to Increase your Sales

❖ Improve profit by looking at the money you earn from sales, and increase:
o The number of customers
o The volume of goods or services existing customers to buy
o The sales price
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What I Can Do

Conduct an interview of at least three (3) successful business people in your locality,
use the following questions as your guidelines:

1. What made him motivate to start a business?

_______________________________________________________
_______________________________________________________
_______________________________________________________
2. What is the nature of his business?
_______________________________________________________
_______________________________________________________
_______________________________________________________
3. How much capital involved?
_______________________________________________________
_______________________________________________________
_______________________________________________________
4. How many years of existence?
_______________________________________________________
_______________________________________________________
_______________________________________________________
5. Did you consider the population of the community?
________________________________________________________
_______________________________________________________
_______________________________________________________

6. How much gross profit did you earn for the first year of operation?
________________________________________________________
_______________________________________________________
_______________________________________________________
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Assessment

How did you understand the lessons that you have studied in this module?
Answer the following questions.

Write True if the statement is correct & write False if you think the answer is not
correct.
_________1. The gross profit rate of the entrepreneurial venture is computed by
dividing the cost of goods sold by net sales.
_________ 2. The gross profit rate provides information on the cost ratio of the
business.
_________3. In evaluating the profitability of the entrepreneurial venture the
evaluation must focus on the information reflected on the face of the
balance sheet.
_________4. The operating profit margin rate indicates information on the
percentage of operating expenses on the net sales.
_________5. Mr. Q is a practicing Doctor of Medicine. During the month of March
2019 he received Professional Fees amounting to P 1,000,000 and
total expenses of P250,000. The net income of Mr. Q is P 750,000.
_________6. Profit is the money received from customer in exchange of
products given to customer.
_________7. The gross profit rate of the entrepreneurial venture is computed by
dividing the cost of goods sold by net sales.
_________8. The gross profit rate provides information on the cost ratio of
business.
_________ 9. One of the objectives in evaluating the gross profit rate of the
business is to determine whether the amount of the gross profit is
sufficient to cover the operating expenses.
_________10. The operating profit margin rate indicates information on the
percentage of operating expenses to net sales.
_________11. The government is not interested in financial statements since it is
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not a party to any of the transactions of the business.
_________12. The net profit margin rate presents the general perspective of the
operating performance of the business.
_________13. The amount of income per peso investment can be determined by
computing the net profit margin rate.
_________14. In normal situation, it is favorable for the business to have high
inventory
_________15. Preparation & presentation of the financial statements of the entity is
the primary responsibility of an accountant.

Additional Activities

After learning how to compute the gross profit at least you have learned now
how to do it by your own. Solve and compute the following:

1. A watch store owner decided to offer 20% discount for a particular brand of
watch that sells at P35,000.00. By doing so, his average sales increased from
5 watches to 12 watches a day. If he bought one watch at a price of
P22,000.00 from the supplier, by how much was his daily profit increased or
decreased by offering such discount on the watch?

2. Michelle went to Baguio and bought 20 jars of strawberry jam for P3,500.00
with 1 5% discount. When she got back to Manila, she sold 10 of the jars for a
total of P1,800.00and the rest as P185.00 each. How much profit did Michelle
again?