Question

Operating profit of a chemical plant is equal to

• A. Profit before interest and tax
• B. Profit after tax plus depreciation
• C. Net profit and tax
• D. Profit after tax

Hint:

Operating profit (EBIT) measures a plant’s core profitability, excluding interest and tax, but including operating expenses like raw materials and labor.

Answer 1

The Correct Option is A

Step 1: Define operating profit. 
Operating profit, also known as operating income or EBIT (Earnings Before Interest and Tax), is a measure of a company’s profit from its core operations. It is calculated as: \[ \text{Operating Profit} = \text{Revenue} - \text{Operating Expenses}, \] where operating expenses include costs like raw materials, labor, utilities, and maintenance, but exclude interest on debt and taxes. Operating profit reflects the profitability of the plant’s operations before financing and tax considerations. 
Step 2: Analyze the options. 
Profit before interest and tax (EBIT): This is the same as operating profit, as it excludes interest and tax expenses, focusing solely on operational performance.
Profit after tax plus depreciation: This includes net profit (after tax) and adds back depreciation (a non-cash expense). This is closer to a cash flow metric, not operating profit.
Net profit and tax: This is ambiguous but likely means net profit plus tax, which would be profit before tax but after interest, not necessarily operating profit.
Profit after tax: This is net profit, which is after deducting both interest and tax, so it is not the same as operating profit. 
Step 3: Evaluate the options. 
(1) Profit before interest and tax: Correct, as operating profit is defined as profit before interest and tax (EBIT), reflecting the plant’s core operational earnings. Correct.
(2) Profit after tax plus depreciation: Incorrect, as this is a cash flow-related metric, not operating profit. Incorrect.
(3) Net profit and tax: Incorrect, as this likely refers to profit before tax but after interest, which may not exclude interest, unlike operating profit. Incorrect.
(4) Profit after tax: Incorrect, as profit after tax includes deductions for both interest and tax, unlike operating profit. Incorrect. 
Step 4: Select the correct answer. 
The operating profit of a chemical plant is equal to profit before interest and tax, matching option (1).