The formula for operating income is gross income minus operating expenses minus depreciation and amortization. Operating income is the revenue that remains after all variable and fixed costs are accounted for.
- Calculate gross income
Gross income is the first level of profit on a company's income statement. Gross income is revenue minus variable costs for the given period. Variable costs, or costs of goods sold, are those directly involved in generating revenue. If revenue for a quarter is $120,000 and variable costs are $60,000, gross income is $60,000.
- Subtract operating expenses
Operating expenses are the fixed costs involved in operating the business. Utility expenses are among the common and significant operating expenses. If $30,000 in operating expenses are subtracted from gross profit of $60,000, operating income before the reduction of depreciation and amortization is $30,000.
- Subtract depreciation and amortization
Depreciation is the amount of write-downs for equipment where the investment is allocated over the life of the asset. Amortization is money paid toward installment loans over the long term. If the total for depreciation and amortization in the quarter is $15,000, this amount is subtracted from $30,000 to determine the final amount for operating income. In this case, $30,000 minus $15,000 equals $15,000, which is the operating income.