Operating income = Total revenues – operating expenses. For instance, when the costs total $30,000 and sales are $60,000, the cost-to-sales ratio will be 50%. This statistic shows the operating expenses as percentage of sales of major sportswear brands in China in 2017. Its cost of goods sold and operating expenses equal $15.4 million. An Example of Calculating Operating Profit Margin Ratio . Operating expense ratio. The formula for the operating expense can be simply expressed as summation of various selling, general and administrative (SG&A) expenses like office staff salaries, sales commissions, promotional & advertising cost, rental expense, utilities, etc. It is a very popular ratio to use in real estate, such as with companies that rent out units. The operating expense ratio (OER) is the cost to operate a piece of property compared to the income the property brings in. A company has gross sales of $20 million. Operating Ratio = (Operating Expenses+Cost of Goods Sold)/Net Sales = (18575+92761)/121615 =0.914739; Advantages of Operating Ratio. Operating Ratio = (Cost of Goods Sold + Operating Expenses) / Total Revenue. It is also called the operating cost ratio or operating expense ratio. A low OER means less money from income is being spent on operating expenses. To calculate your Opex-to-Sales ratio, you’ll need to divide your total operating expenses by net sales figures. Mathematically, it is represented as, Operating Expense Ratio. Improved productivity from the manufacturing may also impact the cost-to-sales ratio. It is important to understand the concept of operating ratio because it is used to evaluate the ability of the company’s management to generate sales while controlling its operating expenses in the process. Operating Profit Ratio. Sales to Administrative Expenses Ratio = Net Sales / General and Administrative Expenses. Try our corporate solution for free! Relevance and Uses of Operating Ratio Formula. Net sales are the total amount of sales the company has generated over the past year after subtracting any discounts, damages, returns, or other losses taken. So imagine that a company earned $552,000 in revenue last year and has $100,000 in OPEX. Operating profit ratio establishes a relationship between operating Profit earned and net revenue generated from operations (net sales). Within a time period inflation, while expenses are increasing, the cost-to-sales ratio may raise as it is more costly to generate sales. General and administrative expenses are the overhead costs involved in executing the sales. The operating ratio formula is the ratio of the company’s operating expenses to net sales, where operating expenses include administrative expenses, selling and distribution expenses, cost of goods sold, salary, rent, other labor costs, depreciation, etc. Another ratio you can derive from operating costs is the operating expense ratio (OER). 50% = $30,000 / $60,000. Calculating the percentage of sales to expenses is commonly referred to as the percentage of sales method.This method is used by business owners and employees within a business who create budgets to determine if the ratio of expenses to sales is appropriate. Note that operating expenses only refers to the standard day-to-day costs of running the business – it doesn’t include things like significant capital investments. (212) 419-8286 The operating income for the year would be $452,000. operating profit ratio is a type of profitability ratio which is expressed as a percentage.. 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