Today, the term “margin” is widely used in exchange, trading, and banking. Its main idea is to indicate the difference between the selling price and the unit cost of a product, which can be expressed both in the form of profit per unit of production and as a percentage of the selling price (profit margin). What is marginality? In other words, it is return on sales. And the coefficient presented above serves as the main indicator, because it determines the profitability of the enterprise as a whole.
What is marginality?
What is the commercial meaning and meaning of this term? The higher the ratio, the more profitable the company. This means that the success of a given economic structure is determined by its high marginality. That is why all decisions in the field of marketing strategies which are usually accepted by managers, it is advisable to base on the analysis of the indicator in question.
What is marginality? It should be remembered: margin also serves as a key factor in predicting the profitability of potential customers, developing pricing policies and, of course, the profitability of marketing in general. It is important to note that in Russia marginal profit is often referred to as gross. In any case, it represents the difference between the profit from the sale of the product (excluding excise taxes and VAT) and the cost of the production process. The amount of coverage is the second name of the studied concept. It is defined as part of the revenue that goes directly to generating profits and covering costs. Thus, the main idea is to increase the profits of the enterprise in direct proportion to the rate of recovery of production costs.
Margin Calculation
To begin with, it should be noted that the calculation of marginal profit is made per unit of output and marketed product. It is he who makes it clear whether one should expect a profit increase due to the release of the next commodity unit. The marginal profit indicator is not a characteristic of the economic structure as a whole, however, it allows you to identify the most profitable (and the most unprofitable) types of product in relation to the possible profit from them. Thus, marginal profit depends on the price and variable costs of production. To achieve maximum performance, you should either increase the margin on products or increase sales.
So, the product margin can be calculated using the following formula: MR = TR - TVC (TR - total profit from product sales; TVC - variable costs). For example, the volume of production is 100 units of goods, and the price of each of them is 1000 rubles. In turn, variable costs including raw materials, wages and transportation, amount to 50,000 rubles. Then MR = 100 * 1000 - 50,000 = 50,000 rubles.
In order to calculate additional revenue, it is necessary to apply another formula: MR = TR (V + 1) - TR (V) (TR (V) - profit from product sales at the current production volume; TR (V + 1) - profit in case increase in output per unit of goods).
Margin Profit and Break-even Point
It is important to note that margin (the formula is presented above) is calculated in accordance with the division fixed and variable costs in the process of pricing. The fixed costs are those that would be preserved even in the event of a zero volume of the manufactured product.This should include rent, certain tax payments, salaries of bookkeeping, human resources, managers and maintenance personnel, as well as repayment of loans and borrowings.
The situation in which the contribution to coverage is equivalent to the amount of fixed costs is called the breakeven point.
At the breakeven point, the volume of sales of goods is such that the company has the ability to fully recoup the costs of producing the product without making any profit. In the figure above, the break-even point is related to 20 units of the product. So, the line of income crosses the line of costs, and the line of profit crosses the origin and goes into the zone where all values are positive. In turn, the margin profit line crosses the line fixed costs to production.
Methods of increasing marginal profit
The question of what marginality is and how to calculate it is considered in detail. But how to increase marginal profit and a priori is it possible? The methods for raising the MR level are mostly similar to the methods of increasing the general level of income or direct profit. These include participation in tenders of various kinds, increasing output for the distribution of fixed costs between large volumes of the product, exploring new market sectors, optimizing the use of raw materials, finding the cheapest sources of raw materials, and also an innovative advertising policy. It should be noted that in general, the fundamental foundations of the marketing industry do not change. But the advertising industry is constantly undergoing some changes, but the main reason for its existence and application has remained the same.
