Entrepreneurship Grade 12 Quarter 2 Module 8: Computation of Gross Profit • DepEd Tambayan

This is the Entrepreneurship Quarter 2 Module 8 self-learning module, Computation of Gross Profit, for Grade 12 Senior High School learners. It is an Alternative Delivery Mode (Second Edition, 2021) module from DepEd Regional Office 10. It teaches learners how to compute a business’s revenues, costs, and profit, and how to read profitability ratios such as the gross profit rate, operating profit margin rate, and net profit margin rate.

The module expects you to already know how to add and multiply numbers.

On this page 8 sections

What learners will learn

After studying the module, learners should be able to:

Identify the 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 and 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 tracking a business’s performance through correct and honest computation and reporting of profit
Appreciate the importance of correctly computing and interpreting the gross profit rate, operating profit margin, and net profit margin

Lessons in this module

Lesson	Topic	Competency code
Lesson 1	Compute for profits	CS_EP11/12ENTREP-0h-j-16
Lesson 2	Create the company’s five (5) year projected financial statements	CS_EP11/12ENTREP-0h-j-17

Lesson 1 explains how to compute gross profit, operating profit, and net profit, and the ratios that go with each.
Lesson 2 shows a sample five-year projected balance sheet and income statement for an online clothing business.

ENTREP12_Q2_M8_COMPUTATION-OF-GROSS-PROFITS

Key ideas: from sales to net profit

The module defines profit as total revenue minus total expenses: the money a business makes during an accounting period. To find total income, add all the money earned in a set period from every source, then subtract any cash refunded to customers for returns or disputes.

Its first example is a small publishing business. In one month it sold P20,000 worth of books, sold the rights to an intellectual property for P7,000, and received P3,000 for promotional materials. Its total income is P20,000 + P7,000 + P3,000 = P30,000.

Gross profit and the gross profit rate

Gross profit is net sales minus cost of sales. The term cost means the purchase price of the product, including everything spent to produce it. The module’s main example is XYZ Trading in 2017:

Item	Amount
Net sales	P734,000.00
Less: Cost of sales	P577,000.00
Gross profit	P157,000.00

Gross profit rate = Gross profit / Net sales. For XYZ Trading, the rate is 21.39%, so its cost ratio to sales is 78.61%. This tells the owner whether the gross profit can cover operating expenses and whether costs are too high. It also helps in setting the selling price. A product with a very high cost will not be competitive.

Operating profit margin

Operating profit margin is gross profit minus operating expenses. Operating expenses are period costs: they are spent in one period and are not expected to benefit future periods. For XYZ Trading, P157,000 less P90,000 in operating expenses gives an operating profit margin of P67,000.

Operating profit margin rate = Operating profit margin / Net sales = 67,000 / 734,000 = 9.13%. A higher rate is better for the business. If there are no interest charges or income tax, the operating profit margin equals net income.

Net profit margin

Net profit is the third level of the income statement. You add interest income and deduct interest expense and income tax from the operating profit margin. XYZ Trading has no interest expense, so only income tax is deducted. The module gives a net profit of P46,900 and a net profit margin rate (Net profit / Net sales) of 6.39%. It advises comparing this rate with similar businesses in the same industry.

Liquidity ratios and return on investment

Current ratio = Current assets / Current liabilities
Quick ratio = (Current assets minus inventories) / Current liabilities. It measures how well a business can pay short-term obligations using only its most liquid assets.
Return on investment (ROI) = Net income / Average total assets. It measures net income per peso invested. Average total assets are based on total assets at the beginning and end of the period.

Sample five-year projection

The module shows projected statements for Fit Mo’to Ready to Wear Online Selling Business. It assumes revenue and cost both grow by 5% a year. In Year 1, revenue is P1,545,673.95, cost is P1,213,275.38, and gross profit before tax is P332,398.56. By Year 5, revenue reaches P1,878,776.34 and gross profit before tax reaches P404,032.53. The business has no liabilities, so total assets (all cash) equal owner’s equity each year.

The module also reminds learners that entrepreneurship is practiced as an art, not a science. Entrepreneurs must keep evaluating the market and respond creatively to changes.

Activities in the module

What’s New, Activity 1: Rodrigo buys 10 boxes of perfume at P12,000 per box, with 12 bottles per box. He sells each bottle at P1,500. His cost is P120,000, his net sales are P180,000, and his profit is P60,000.
What’s More: Annie buys a dozen smartphones and sells them at two different prices. Learners compute her profit or loss, gross profit rate, operating profit margin rate, net profit margin rate, and ROI. Two reflection questions follow on creativity in small neighborhood businesses.
What I Can Do: Interview at least three successful business people in your locality. Ask about their motivation, type of business, capital, years in operation, the community’s population, and first-year gross profit.
Additional Activities: Two profit problems, one about a watch store offering a 20% discount and one about Michelle reselling strawberry jam from Baguio.

How to use this module

Work through the parts in order:

What I Need to Know
What I Know (a 15-item true or false pretest)
What’s In
What’s New
What Is It
What’s More
What I Have Learned
What I Can Do
Assessment (the same 15 items as the pretest)
Additional Activities

For learners: Answer the pretest before reading, then compare your score with the final assessment. The answer key at the end covers both tests and the Activity 1 solution. Try each problem yourself before you check it.

For parents: Help your child set up the business interview in What I Can Do. Neighbors who own small shops are good interviewees.

For teachers: The What’s More, What I Can Do, and Additional Activities problems have no printed answers. Check them yourself before you give them out. Also review the answer key items noted in the FAQ below.

Frequently asked questions

What grade and quarter is this Entrepreneurship module for?

It is for Grade 12 Senior High School Entrepreneurship, Quarter 2, Module 8. It is a Second Edition (2021) Alternative Delivery Mode module from DepEd Regional Office 10.

How do you compute the gross profit rate?

First subtract cost of sales from net sales to get gross profit. Then divide gross profit by net sales. In the module’s XYZ Trading example, P157,000 divided by P734,000 gives a gross profit rate of 21.39%.

What is the difference between gross profit, operating profit, and net profit?

Gross profit is net sales minus cost of sales. Operating profit is gross profit minus operating expenses. Net profit is operating profit adjusted for interest income, interest expense, and income tax.

Does the module have an answer key?

Yes. It gives answers for the 15-item What I Know pretest, the 15-item Assessment, and the solution to Activity 1 (Rodrigo’s perfume business, with a profit of P60,000). The What’s More, What I Can Do, and Additional Activities problems have no printed answers.

What competencies does the module cover?

Lesson 1, Compute for profits, is coded CS_EP11/12ENTREP-0h-j-16. Lesson 2, Create the company’s five-year projected financial statements, is coded CS_EP11/12ENTREP-0h-j-17.

Full text of the module

The text below is a transcription of the PDF above, as printed.

Entrepreneurship Quarter 2 — Module 8: Computation of Gross Profit

[illustration: students and a teacher with a globe, lamp, and books; decorative DepEd ADM artwork]

CO_Q2_Entrepreneurship SHS Module 8

Development Team of the Module

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

Republic Act 8293, section 176 states that: “No copyright shall subsist in any work of the Government of the Philippines. However, prior approval of the government agency or office wherein the work is created shall be necessary for exploitation of such work for profit. Such agency or office may, among other things, impose as a condition, payment of royalty.”

Borrowed materials included in this module are owned by the respective copyright holders. Effort has been exerted to locate and seek permission to use these materials from the respective copyright owners. The publisher and author do not represent nor claim ownership over them.

Role	Names
Writers:	Joel Y. Yacas; Janice B. Dominguez; Naneth M. Valdehuesa; Ronee D. Quicho; Mary Cris A. Maquilan; Marylinda T. Puzon; Charity E. Parel; Denver E. Neri; Lorena Fe S. Anub; Ethel Lalaine B. Morales
Evaluators:	Cherryl F. Descallar; Jessie Cris N. Abrogueña; Eddy Lou T. Hamak; Milger A. Baang; Sherriemae V. Reazol
Illustrator & Layout Artist:	PSSg Edzel M. Dominguez, Ivy O. Niñeza
Management Team:	Arturo B. Bayocot, PhD, CESO III, Regional Director; Victor G. De Gracia Jr., PhD, CESO V, ARD; Mala Epra B. Magnaong, Chief CLMD; Bienvenido U. Tagolimot, Jr., PhD, Reg EPS ADM; Elson C. Jamero, EPS-Designate-TLE; Marie Emerald A. Cabigas, PhD, Reg EPS, LRMS; Erlinda G. Dael, CESE, PhD, CID Chief; Celieto B. Magsayo, Div LR Supervisor; Andrian S. Tecson, Div ADM Coordinator

Printed in the Philippines by: Department of Education – Regional Office 10 Office Address: Zone 1, Upper Balulang Cagayan de Oro City 9000 Telefax: (088) 880-7071, (088) 880-7072 E-mail Address: region10@deped.gov.ph

Entrepreneurship

Quarter 2 – Module 8

Computation of Gross Profit

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?

It outlines the concepts and basic principles, and processes of developing a business plan.
It helps you understand the environment and market in your locality as a factor in developing a business concept.
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.

What I Need to Do – the part used to introduce the learning objectives in this module.
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.
What’s In – the part used to connect your previous learning with the new lesson.
What’s New – the part used to introduce new lesson through a story, an activity, a poem, song, situation or activity.
What is It – the part that will help you discover and understand entrepreneurial concepts.
What’s More – the part that will help enrich your learnings of entrepreneurial concepts.
What I Have Learned – the part that will help you process what you have learned In the lesson.
What I Can Do – the part that allows you to apply what you have learned into real life situations.
Assessment – the part that evaluates your level of mastery in achieving the learning objectives.
Additional Activities – the part that enhances your learning and improves your mastery of the lesson.

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.

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.

What I Know (continued)

_____ 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.

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?

Lesson 1: Computation of Gross Profit

CO_Q2_Entrepreneurship SHS Module 8

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:

How much profit does Rodrigo earn?
Is it good to engage in a business like Rodrigo’s? Yes or No?
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.

The gross profit margin is computed as follows:

Gross Profit Rate = Gross Profit / 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:

gross profit rate = 46,900.00 / 734,000.00

gross profit rate = 21.39%

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,

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 Rate = Operating Profit Margin / Net Sales

By applying

Operating Profit Margin Rate = 67,000.00 / 734,000.00

Operating profit margin rate = 9.13%

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

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 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

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 margin rate = Net Profit / Net Sales

By applying the formula, the profit margin of XYZ

Net profit margin rate = 46,900.00 / 734,000.00

Net profit margin rate = 6.39%

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.

The formula to compute ROI is as follows:

Return of Investment = Net Income / Average Total Assets

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

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.

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

Now ask yourself the following questions:

Is creativity present in the operation of ordinary small businesses along the streets and highways and in your neighborhood? Why do you say so?

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

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:
- The number of customers
- The volume of goods or services existing customers to buy
- The sales price
- [transcriber’s note: empty bullet printed here]

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:

What motivated him to start a business?

What is the nature of his/her business?

How much capital was involved?

How many years has the business been existing?

Did he/she consider the population of the community?

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.