Quarter 2 — Module 8

Computation of Gross Profit

CO_Q2_Entrepreneurship
SHS Module 8
Entrepreneurship – Grade 12
Alternative Delivery Mode Quarter
2 - Module 8
Second Edition, 2021

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Naneth M. Valdehuesa Ronee D. Quicho
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Lorena Fe S. Anub Ethel Lalaine B. Morales
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Eddy Lou T. Hamak Milger A. Baang
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Marie Emerald A. Cabigas, PhD, Reg EPS, LRMS
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Entrepreneurship
Quarter 2 – Module 8
Computation of Gross
Profit

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 Introductory Message
For the Learner
Have you ever dreamed of becoming the next multi-millionaire? If you’re thinking that
winning the lottery is the only way to become one, well, think again. It is not chance that
gives you millions, instead being a millionaire is a result of hard work and determination.
Starting your own business is a good beginning towards fulfilling your dreams.
Entrepreneurship is the way!
You may often hear the word entrepreneur and entrepreneurship. But what do these terms
mean? You may refer to an entrepreneur as the person managing the business and
entrepreneurship as the business venture. Some may say there is no difference. So, what does
this module provide you towards reaching your dreams?
1. It outlines the concepts and basic principles, and processes of developing a business
plan.
2. It helps you understand the environment and market in your locality as a factor in
developing a business concept.
3. It allows you to experience starting and operating your own business.
Substantial knowledge of entrepreneurial principles and processes is important as this increases
the chances of making your business successful.
In this module, you are guided with a set of learning parts that will help you understand the
underlying principles of entrepreneurship.

1. What I Need to Do – the part used to introduce the learning objectives in this
module.
2. What I Know – this is an assessment as to your level of knowledge to the subject matter at
hand, meant specifically to gauge previous knowledge.
3. What’s In – the part used to connect your previous learning with the new lesson.
4. What’s New – the part used to introduce new lesson through a story, an activity, a poem,
song, situation or activity.
5. What is It – the part that will help you discover and understand entrepreneurial
concepts.
6. What’s More – the part that will help enrich your learnings of entrepreneurial
concepts.
7. What I Have Learned – the part that will help you process what you have learned In the
lesson.
8. What I Can Do – the part that allows you to apply what you have learned into real life
situations.
9. Assessment – the part that evaluates your level of mastery in achieving the
learning objectives.
10. Additional Activities – the part that enhances your learning and improves your
mastery of the lesson.

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 What I Need to Know

As we all know, 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 the 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.

This module is divided into two lessons:

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

Lesson 2 – Create the company’s five (5) year projected financial
statementsCS_EP11/12ENTREP-0h-j-17

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

multiplying numbers will best help.

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 After carefully studying the contents of this module, you should be able to:

 Identify essential components in computing revenues and costs;

 Differentiate between gross profit, operating profit and net profit;
 Interpret financial ratios such as the gross profit rate, operating profit margin and net
profit margin;
 Compute actual revenues;
 Compute actual costs;
 Compute gross profit, operating profit and net profit;
 Compute the gross profit rate, operating profit margin and net profit margin;
 Create profit schedules and reports;
 Appreciate the importance of keeping track with the performance of one’s business
through the correct and honest computation and reporting of business profit; and
 Appreciate the importance of the correct computation and interpretation of
financial ratios gross profit rate, operating profit margin and net profit margin.

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 and write False if you think the statement 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.

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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 the 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 the
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 a normal situation, it is favorable for the business to have high
inventory.
15. Preparation and presentation of the financial statements of the entity is the
primary responsibility of an accountant.

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Lesson
Computation of Gross Profit
1

What’s In

Let’s review what is revenue of the business. This is an important tool and material
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 get ready for any
incoming event. Forecasting is the tool used in planning that aims to support management or
a business owner in his desire to adjust and cope 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 P12,000.00 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 profit does Rodrigo earn?
2. Is it good to engage in a business like Rodrigo’s? Yes or No?
3. What do you think of Rodrigo’s business? Is it good for a beginner?

What Is It

Computing the Gross Profit

The profitability ratios are a group of financial statements 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 is as
follows:

Net Sales P 734, 000.00

Less: Cost of Sales 577, 000.00
Gross Profit P 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 the total outlay
required in producing it.

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The gross profit margin is computed as follows:
Gross Profit
Gross Profit Rate =
Net Sales

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 2017 is computed as follows:

46,900.00
gross profit rate =
734,000.00

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 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 is 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,
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the amount of the operating profit margin is equal to the net income.

Gross Profit P 157,000.00

Less: Operating Expenses 90,000.00

Operating Profit Margin P 67,000.00

This information states 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.

Operating Profit Margin

Operating Profit Margin Rate =
Net Sales
By applying
Operating Profit Margin Rate
= 67,000.00
734,000.00

The operating profit margin of the business measures the percentage of profit
available after deducting the cost of sales and operating expenses of the business. A higher
operating profit margin is favorable to the business.

Net Profit Margin Rate

Operating Profit Margin xxxxxxx

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

The income statement is the net profit margin and 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.

Net Profit
Net profit margin rate =
Net Sales

By applying the formula, the profit margin of XYZ

46,900.00
Net profit margin rate =
734,000.00

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.

Analyzing the Liquidity Status of the Business

Liquidity Ratios

Current Ratio = Current assets / Current Liabilities

Quick Ratio = (Current Assets – Inventories) / Current Liabilities
Current liabilities= (Cash and Equivalents + Marketable Securities + Accounts Receivable)

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.

Return of Investment (ROI)

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

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The formula to compute ROI is as follows:

The average total asset is calculated 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 - - - - -
Owner’s
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

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

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 Yearly increase in revenue is assumed at 5% Yearly
increase in cost is assumed at 5%

As a future entrepreneur, one should always remember that nothing is permanent in

the field of entrepreneurship. What is applicable to one entrepreneur may not be applicable to
another. Certain things may happen to one entrepreneur but may not happen to another.

Entrepreneurship should be practiced not as a science but as an art. Creativity should

always be applied by an entrepreneur through 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 importance in entrepreneurship is that the business activities are
performed correctly.

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 a dozen at a price of P18,000.00 per unit. However, a new model of
smartphones 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

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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. Do you consider the business practices of small business owners a form

of entrepreneurship?

What I Have Learned

The profitability and ratios are a group financial statement ratios that primarily
determine the profitability 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

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 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 and 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
o

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 motivated him to start a business?

2. What is the nature of his/her business?

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 3. How much capital was involved?

4. How many years has the business been existing?

5. Did he/she consider the population of the community?

6. How much gross profit did he/she earn for the first year of operation?

Assessment

How much did you understand the lessons in this module? Answer the following questions.

Write True if the statement is correct and write False if you think the statement 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.

13 CO_Q2_Entrepreneurship SHS
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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 the 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 the
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 a normal situation, it is favorable for the business to have high
inventory.
15. Preparation and presentation of the financial statements of the entity is the
primary responsibility of an accountant.

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 Additional Activities

After learning how to compute the gross profit, try solving the given problems
below:

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 15%
discount. When she got back to Manila, she sold 10 of the jars for a total of P1,800.00
and the rest as P185.00 each. How much profit did Michelle gain?

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