Financial analysis the organization’s activities is a very important tool for monitoring and evaluating the quality and effectiveness of its work. All indicators are of great importance. But special attention is paid to income and profits. The analysis of these factors is carried out in the context of various types of income by economic and marketing content. In many modern enterprises, the analysis of income is carried out not only for the purpose of evaluation. It is made for the successful adoption of further strategic decisions. In this case, marginal income is used for analysis as an approach to determining the profit necessary for making responsible business decisions.
The concept of marginal income
In addition to the important indicator of profit, showing the main result of activity, other equal concepts are also used. One of them is marginal income. This term comes from a consonant English phrase, translated in its pure form as "marginal return." It is used in several cases:
- It means the amount of additional profit resulting from the sale of an additional unit of manufactured products.
- Indicates calculated revenue minus variable costs.
The main economic significance of marginal income is to determine the impact of a management decision on the amount of profit and the flow of fixed assets. Thanks to this, it becomes possible to set sales levels so that the profit is maximum, that it does not exist or that there are losses at all.
The relationship of marginal income, profits and costs
Education and profit distribution - These are important business processes. Therefore, in the analysis of financial activity, a very important role is played by the consideration of profit from the factors that influence it. Marginal income and profit are two interrelated indicators. The first after calculation determines the marginal value of the second. Both indicators play a very important role in the analysis of the financial activities of the organization, its prospects and decision-making for break-even work.
Also, these two economic terms are closely related to the costs of the enterprise. After all, marginal revenue shows how much profit is able to cover variable costs, which are directly included in the cost of production. In general, all costs of the enterprise represent direct and variable costs. Exactly variable costs have a great influence on the production process and profit. They are directly related to the volume of goods produced.
Margin Income Calculation
According to one of its values, marginal income is a calculated indicator intended for the analysis of activities, but primarily for making the right marketing decisions. The calculation of this income is carried out in order to determine the difference between all revenue and variable costs. It should be noted that the price and fixed costs Do not participate in influencing marginal income. The formula (below) of its definition shows the possibility of covering costs that directly depend on the volume of production, profit received from the sale of these volumes.
TRm = TR - TVC,
where TRm - Marginal revenue;
TR - income (total revenue);
TVC - variable costs (total variable cost).
An important role is played by the calculation of this indicator at an enterprise where several types of goods are produced simultaneously. In this case, it is very difficult to understand which type of product takes the largest share in total revenue.
Margin Income Calculation Options
In order to calculate the amount of revenue necessary to cover costs, in practice, two indicators are used: the coefficient and the value of marginal income. Moreover, most often they seek to define marginal income as a dependence of the effectiveness of managerial decisions on covering variable costs.
Two calculation methods are used:
- Of the total revenue, variable costs are minus.
- Variable expenses and profit margin are added up.
Many analysts take into account the average value of this income. It is derived by subtracting from the price of the product the average value of variable costs. And in parallel, they calculate the coefficient of such income by determining its share in revenue from sales of products.
Margin Income Analysis
The company is characterized by regular analysis of the activity as a whole and its individual indicators. An analysis of marginal income is necessary, since its value has a direct effect on profit. According to the results of its calculation, the following conclusions are made:
- The exponent is zero. Consequently, revenue covers only variable costs, and the company incurs a loss in the amount of fixed costs.
- The indicator is greater than zero, but less than the value of fixed costs. Consequently, revenue covers variable costs and part of fixed costs, and the loss is equal to the value of the uncovered part.
- The indicator is equal to the sum of fixed costs. Consequently, the revenue is enough to work without loss, but also without profit. This situation in the economy is called the breakeven point.
- The indicator is higher than fixed costs. Consequently, revenue allows you to cover all expenses and make a profit.
The definition of marginal income plays an important economic role in the financial analysis of the enterprise. Thanks to this indicator, it is possible to establish the dependence of revenue, profit and costs. This relationship is of particular importance in making financial decisions in the field of production.
