Revenue from operations

Gross profit = Revenue from operations – Cost of revenue from operations A higher gross profit ratio indicates high profitability. It should be sufficiently high to provide for indirect expenses to be paid by a business. Illustration Calculate gross profit ratio from the following: Revenue from operations ` , , , Cost of revenue from operations ` , and purchases ` , . = ` , = ` , , Gross profit Gross profit ratio = × Revenue from operations =x = % , , Gross profit = Revenue from operations – Cost of revenue from operations = , , – , = ` , (ii) Operating cost ratio Operating cost ratio is the proportion of operating cost to revenue from operations.

This ratio is a test of the operational efficiency of the business. It is calculated as under. Operating cost Operating cost ratio = × Revenue from operations Operating cost is the cost which is associated with the operating activities of the business. Operating cost = Cost of revenue from operations + Operating expenses Operating expenses = Employee benefit expenses + Depreciation + Other expenses related to office and administration, selling and distribution A lower operating ratio indicates better profitability.

Lesser the operating cost ratio, higher is the margin available for payment of non operating expenses such as interest on loans, loss on sale of fixed assets, etc. Illustration Following is the statement of profit and loss of Maria Ltd. for the year ended 31st March, . Calculate the operating cost ratio.