CHAPTER IV

THE ECONOMICS OF THE BUSINESS

4.1 Gross and Operating Margins

In business, gross margin measures the return on the sale of goods and services. It

is derived by subtracting the costs of direct labor, direct materials, and factory overhead

from sales. It is designed to track the relationship between product prices and the costs of

those products, and is closely watched to see if product margins are eroding over time.

The operating margin subtracts operating expenses from the gross margin. This

means that all selling, general and administrative expenses are deducted from the cost of

goods sold, which leaves the profit or loss generated by the core operations of a business.

In essence, the operating margin is designed to track the impact of the supporting costs of

an organization on its gross margin.

K-Siete Tilapia Farm example of how these margins is calculated, K- Siete

Tilapia Farm business has 100,000 pesos of sales in a month, a cost of K-Siete Tilapia

Farm sold of 40,000 pesos, and operating expenses of 50,000 pesos. Based on this

information, K-Siete Tilapia Farm gross margin is 60% and the K-Siete Tilapia Farm

operating margin is 10%.

Table 4.1 The Gross and Operating Margins of K-Siete Tilapia Farm
OCTOBER NET PROFIT

Sales 100,000
 Cost 40,000

Operating Expenses 50,000

Gross Margin 60%

Operating Margin 10%

To make it short, the Income Statement takes service income and subtracts all the

expenses to get the net income or profit. The result would divide by the service income

and multiply by 100 percent to get the net profit margin.

4.2 Profits Potential and Durability

Profit potential is often called income potential that describe the potential for a

product or services like the K-Siete Tilapia Farm business that plan to make money. This

computation is sometimes called a risk versus profit assessment in which, the assessment

does is to note the costs and risks associated with production and sales for a product or

business. It then weighs these outgoing expenses against the estimated revenue from sales

projections to decide if the product will result in a profit. For example, refer to the tables

below:

Base on Monthly Computation

Table 4.2 The Monthly Revenue Computation of K-Siete Tilapia

Products Demand Product Price Revenue

Fresh Tilapia 3,000 156/kl. 468,000

Dried Tilapia 2,000 160/kl. 320,000

Total Revenue 788,000

Table 4.3 The Monthly Expenses Computation of K-Siete Tilapia Farm
Products Demand Revenue Expenses

Fresh Tilapia 3,000 468,000 180,000

Dried Tilapia 2,000 320,000 160,000

Total Expenses 340,000