Marginal profit is the difference between the revenue from the sale of products that were produced by an enterprise and the costs that arose as a result of the creation of these products.
A bit about margin profit
Very often it is also called the sum of coverage. This can be explained by the fact that it is the revenue that the company receives to cover wages and to create the so-called constant profit. That is, if the marginal income (profit) is higher each time, then this means that cost recovery will be faster and the company will receive more net profit.
Marginal income in Russia
In the Russian Federation, the term “marginal profit” is used less frequently. With a stretch, we can say that gross profit is almost the same, because the meaning of these two operations is very similar. But there are some differences in them.
Gross income in calculating uses non-production and production costs, but in the margin approach, they are considered more elastic. At the same time, such income is calculated both per unit of products sold, and per unit of output. Why is it necessary to calculate it? To get the most accurate information about how much profit each company produces.
Moreover, in Russia there is another important term that is directly related to the money received - the marginal profit of the enterprise. It includes all income from the sale and production of various products.
Very often, marginal profit is incorrectly identified with the so-called direct costing system. But there are significant differences in them, which experts in this field know about. As a rule, on the territory of the Russian Federation, marginal income is used in the market and production sphere of entrepreneurship, because it is here that it brings maximum results.
When can we assume that a company is generating revenue?
In the event that the analysis of marginal profit shows that the income of the enterprise is good enough covers any variable costs we can say that profit here exists at a high level. Moreover, in the process of analysis, it is necessary to take into account the entire range of manufactured goods. Marginal profit also helps to understand which types of products are the most profitable for production in terms of sales, and which are unprofitable or completely unprofitable.
What does marginal profit depend on and how can it be increased?
As a rule, it primarily depends on variables in the modern market indicators.
This is the cost of manufacturing one unit of goods and the price at which this product can be sold.
Almost marginal profit may increase. How to get more income?
Firstly, you can make a margin on the range of your products several times more. Secondly, you can produce and, accordingly, sell more goods. But the best thing, of course, is to combine these two methods, then you will get higher profits. Of course, these methods seem simple, but sometimes it is not so easy to bring them to life.
First of all, this is due to price competition, which nevertheless dictates its conditions in setting the price of a particular product. Sometimes it happens that it is impossible to raise the cost of production. Also, the state often determines limits on value, especially on basic necessities.In addition, it often happens that a large number of cheap products on the market bring about a decline in their quality. This, in turn, can lead to the fact that there will be no demand for it.
Determine Margin Profit
When an enterprise produces several products at the same time, then marginal profit and its calculation are a very important part of operational analysis. It should also be remembered that the greater the volume of products the company produces, the less costs it will receive per unit of goods. This works and vice versa. Since this necessarily includes the calculation of such fixed costs like renting premises, paying taxes and so on, then marginal profit, the formula of which
- MP = PE - Zper,
shows how much should cover the costs of production. In this formula, the MP shows the marginal profit, PE indicates the net profit of the enterprise, and Zper is the costs of the variables. If your income only covers the costs of the company, then it is at the “breakeven point”.
Why do you need to know what marginal profit your company has?
First of all, this formula will allow you to understand which product you are producing is the most demanded in the market at the moment. It is on its manufacture that you need to focus in order to get a sufficiently large income. Calculating the marginal profit from each type of product, you can get an almost complete picture of the productivity and profitability of your company.
The negative sides of this method
- There is a linear relationship between costs and revenues, which means that even with an increase in the volume of manufactured goods, the price on the market may not change. At the same time, at certain points, the cost can very sharply decrease or increase.
- Fixed and variable costs, which can be considered from the point of view of attitude to the costs of one unit of goods, can have other values in terms of. For example, constants can become variables, or vice versa. At the same time, the constants will directly depend on the volume of output, and the variables at the moment will not change. This may slightly bring down the information received, which gives us marginal profit (including its calculation).
- Affecting factors will not change. This includes technology, scale of production, labor productivity, labor costs, selling price of products. That is, only volume can be a variable factor.
- Production and sales should be equal in volume.
