Final answer:
Operating income is the profit a company makes from its core operations after deducting all operating expenses, excluding interest and taxes. It measures a company's operational efficiency and its ability to generate profit from its regular business activities. It's influenced by factors like profit margin, average costs, and returns to scale.
Step-by-step explanation:
Operating income, also known as operating profit or operating earnings, is a key financial metric that represents the profit a company makes from its core business operations after subtracting all necessary operating expenses. These expenses include the cost of goods sold (COGS), salaries, rent, and other operating costs, but exclude interest and taxes. In terms of accounting profit, operating income is calculated as total revenues minus explicit costs, such as depreciation. It is an indicator of a company's operational efficiency and its ability to generate profit from its regular business activities.
The concept of average profit, which is the profit margin or profit divided by the quantity of output produced, relates directly to operating income as it measures profitability per unit of output. The concepts of average total cost and average variable cost are also tied to understanding operating income, as these costs impact the overall profitability of a company. When a company achieves constant returns to scale, it means that increasing all inputs proportionately does not change the average cost of production, which can stabilize operating income.