Marginal profit is the amount Money, remaining after deducting from the income from sales the costs associated with the production of goods or their purchase. If all other types of expenses are taken away from it, then the net income of the enterprise for the reporting period will be obtained.
Formula for Determining Marginal Profit
Total sales income - all costs associated with the production of goods or their purchase / Total sales income
Thus, if a company earned 250 thousand rubles from the sale of goods that cost it 100 thousand rubles, then its marginal profit will be the difference between revenue and costs as a percentage:
250,000 - 100,000/250,000 = 0.60 or 60%
Why do you need to calculate marginal profit?
The closer your score is to 100%, the better. After all, the higher this indicator, the more money your company has to cover other types of expenses.
In most cases, the figure drops well below 100%: most likely you will get less than 50%.
Marginal profit can be used not only to calculate the profitability of a company, but also to calculate the profitability of each individual product or service line. This helps to determine the feasibility of selling certain goods, as well as adjust their pricing. In case if total score contribution margin will be too low, the viability of the enterprise as a whole is called into question. However, if all other costs are minimal, then it makes sense to continue the business. Additional adjustments in marketing and pricing are also welcome.
Improving the margin indicator
In the case of a low marginal profit, pay attention to fixed costs related to the product: material cost for manufacturing, shipping cost and so on. Try to lower them, and also pay attention to a possible increase in the market price of a product or service.
The lower this indicator is, the more difficult it is to keep the business afloat. Don't be afraid to adjust different spending paths. Perhaps moving the firm to another location with a lower rent or downsizing will increase your marginal profit.
Let's talk about marginal profit, its calculation formula, analysis methods, features and its relationship with other types of enterprise profit.
Marginal profit. Definition
marginprofit (analogues: MR, marginal revenue, marginal income, contribution to coverage, additional revenue, marginal revenue, gross profit) is the difference between the income from sales of the company's products and variable costs. Income is understood as the proceeds received by the enterprise from the sale of its products, excluding VAT. Variable costs include such costs: for materials and raw materials, wages of working personnel, fuel, electricity, etc.
It should be noted that variable costs, unlike constants, change non-linearly depending on the volume of production. The higher the volume of production, the lower the variable costs and the higher the marginal profit. This effect in economics is also called "scale effect". It is explained by the fact that when setting up mass production, the cost of production is significantly reduced.
The economic meaning of marginal profit
In each coefficient or indicator, one should, first of all, see its main economic meaning. So marginal profit shows what maximum profit can generate businesses. The greater the marginal profit, the higher the company's ability to cover its fixed costs/costs. Marginal profit is sometimes called a contribution to coverage, and it is understood: how it affects the formation of the net profit of the enterprise and coverage (financing) fixed costs. The marginal profit indicator is used to assess the amount of profit coverage of production costs both in general and for each type (nomenclature) of goods.
The formula for calculating the marginal profit of an enterprise
The formula for gross marginal profit of an enterprise consists of two main indicators: revenue from sales of products and variable costs. Below is the calculation formula for the enterprise as a whole:
Marginal profit= Income - Variable Costs;
In addition to calculating the marginal profit / income for the entire volume of production, the marginal profit of each type of manufactured product is also calculated. The marginal profit of each product is calculated as the difference between the sales / sale price and its cost.
Marginal profit nomencl.= Price - Cost;
The calculation of the marginal profit for each manufactured product range allows you to exclude economically unprofitable products. Let's take an example, we produce cement of various brands: M300, M400 and M500. The calculation of the marginal profit for each brand allows you to select those that are not advisable to produce. The table below shows an example of a comparison between different grades of cement.
|
Grade of cement |
Selling price 50 kg. | The cost of production is 50 kg. | Marginal profit |
conclusions |
| 200 rub. | 100 rub. |
Marginal profit is 100 rubles. |
||
| Marginal profit 50 rubles. | ||||
| 400 rub. | 500 rub. | Margin. profit is negative, it is not advisable to produce this product range. |
The marginal profit of the enterprise is formed due to various groups of goods and products. This can be represented as a hierarchical scheme. Representation in the form of such a scheme allows the analyst to conclude that the production of a product or group of products is inappropriate if their marginal profit less than zero. The figure below shows the margin scheme. profit at the enterprise as a whole, green color shows goods that have a positive contribution margin, red negative. This sets the task for the production and sales department of the need to change the income / cost of sales of this product / group.
Calculation of marginal profit in Excel by balance
In the domestic balance sheet, instead of marginal profit, the term gross profit is used. To calculate it, it is necessary to subtract from the Revenue (excluding VAT) the cost of sales.
Gross profit= p.2110 - p. 2120;
Analysis of changes in gross profit over the years allows you to make a forecast about the situation in production and sales. AT this example the balance sheet of OAO “Surgutneftekhim” was considered. You can see the positive dynamics of gross profit growth over the past five years.
Relationship between marginal profit and other types of profit of the enterprise
In order to understand the place of marginal profit in the enterprise profit system, consider the figure below. Marginal profit comes in second place immediately after sales proceeds (sales proceeds) of products excluding VAT, and its volume will directly determine the size of operating, profit and net profit.
Profit margin analysis is carried out in order to determine the critical volume of production and sales of goods to cover variable costs. Profit margin analysis is similar to the analysis of the break-even point of the enterprise and is based on similar restrictions:
- The company's income and costs have a linear relationship.
- Prices for sold products do not change. Only under this condition it is possible to determine the amount of cash receipts from sales in the future.
- Enterprise productivity does not change.
- Stocks finished products small, as a result, they do not affect the future volume of sales. All products manufactured at the enterprise are immediately sold (sold).
- Stability of the external and internal environment. External macroeconomic factors have a sustainable impact. To external factors include: the financial policy of the state in relation to enterprises, tax deductions, interest rates of the Central Bank, demand for products in the region and industry, etc. Internal factors within the enterprise itself do not have a dramatic impact on productivity. To internal factors include: production technology, tariffs wages etc.
Relationship between break-even point and marginal profit
The break-even point is important financial indicator enterprise, which characterizes the critical level of production at zero profit, we will analyze its relationship with marginal profit. The figure below shows this connection. At the break-even point, the size of losses and profits are equal, while marginal profit (margin) is equal to the costs of the cost of production (fixed costs), while net profit is equal to zero. You can read more about the break-even point in the enterprise in my article ““.
Graphical analysis of marginal profit includes the following areas:
- assessment of the break-even volume of production/sales of products;
- determination of the zone of profitability / unprofitability of the enterprise,
- profit forecasting for different sales volumes;
- calculation of the critical level of fixed costs for the selected marginal profit;
- minimum allowable selling prices of products for a given volume of production, variable and fixed costs.
The problem with using this model is that in the future, production volumes are influenced by many factors, which distorts the linear relationship between production volume and sales.
Video lesson: “How to calculate the margin and the optimal price for maximum profit”
How to increase the marginal profit of the enterprise?
The marginal profit formula consists of two components: total sales revenue without VAT and Variable costs, therefore, in order to increase marginal profit, you need to focus on increasing the size of total income and reducing variable costs. The table below shows the possible managerial methods increasing total revenue and reducing variable costs.
| Increase in total income | Reducing variable costs |
| Participation of the enterprise in various tenders | Use of cheaper raw materials and fuels |
| Expansion of sales markets for products | Automation of the functions of working personnel |
| Advertising companies, development of effective methods for promoting products | Introduction of new production technologies |
| Use of debt capital to finance new production facilities | Outsourcing of part of the functions of production and sale of the company's products to third-party firms and organizations |
| Issuance of bonds, entering the stock market (IPO/SPO) | Change in product range |
| Change pricing policy enterprises | Implementation of innovations |
In this article, we examined various aspects of such a concept as the marginal profit of an enterprise. This indicator is very important for assessing the competitiveness of the enterprise and its products in the market. Diagnostics of the state of marginal profit by product range allows you to identify products leaders and outsiders and form the necessary set of measures to increase productivity and sales.
Margin- the difference between the initial and final cost, interest rate, sale price and purchase price, price and cost, is used to determine the profitability.
To determine the effectiveness economic activity, the purpose of which is to maximize , the main analytical indicators are:
- marginal income (indicator of profitability),
- marginal (payback indicator).
Marginal profit or marginal income is the value obtained by subtracting from gross income variable costs, hence the margin is a source of compensation fixed costs and generating profits. The calculation is made according to the following formula:
Margin (profit per unit of output) = Selling Price - Cost
Determining marginal profit helps to establish the optimal size of the trade margin, sales volume and level of variable costs even at the planning stages. To calculate marginal income in percentage terms, use profitability ratio (marginality):
Margin Ratio (KP) = Margin / Selling Price
Marginal profitability, in turn, is the ratio of marginal income and cost:
Marginal profitability = Marginal profit / Direct costs
It can be calculated both on a gross basis and per unit of goods (works, services).
Thus, by itself, the gross margin does not reflect the financial position of the enterprise, but is used for calculations in the analysis of economic activity. At the same time, in domestic practice (Russia, Belarus) there is a difference from the European system for calculating the gross margin.
In the post-Soviet space, the gross margin is calculated as the difference between gross revenue and total costs, expressed absolute value. In Europe, this figure is a percentage of total sales revenue, minus direct costs, and is expressed as a percentage only.
When determining the amount of profit, depending on different options for the volume of output or sales, the calculation of the average marginal income is used. It is equal to the difference between the price per unit of product and the average variable costs of its manufacture and / or promotion. This indicator reflects the share per unit of production in covering fixed costs and making a profit.
Carrying out marginal analysis contributes to the effective distribution production possibilities and limited working capital, helps to optimize the composition and volume of production and sales of products, analyze the activities of individual divisions of the enterprise, and is also an integral part of pricing. In a global sense, based on the results of marginal analysis, it is possible to make a decision either to conclude additional agreements, or about the closure of production or one of its areas even during planning, as it allows you to calculate the break-even point and visually see the situation with the profitability of various types of products.
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Any business involves ultimate goal extracting profit. The economic meaning of this category may differ depending on which funds are included in it and what costs and additional payments are excluded. The type of profit is also important in relation to the purpose of its allocation. So, income as taxable profit is of interest to tax authorities, and distributed profit is of interest to shareholders. The businessman himself will be primarily concerned with net profit.
However, when planning the possibility of investment, evaluating the effectiveness of entrepreneurship, one must take into account that in order to calculate profit, it is necessary to remove from the calculations not only fixed, but also variable costs, despite the fact that they are difficult to predict. Such profit - marginal - will more accurately reflect the financial performance of the business.
Consider the essence of marginal profit, give the formula by which the margin and break-even of production are calculated. Let's analyze the factors affecting the margin, as well as possible ways to increase this type of profit.
Marginal profit: what is it
The profit of the enterprise is formed as a result of the production of products and its sale, minus the costs incurred in the process of this production, as well as the costs of organization and management.
Marginal profit(from the English "Margin" or the French "Marge", which means "difference") - this is the income of the enterprise, formed by the proceeds from the sale of a certain volume of goods, minus the costs incurred in the production process (variable costs) of the same volume of products.
This financial category is sometimes called the “coverage amount”, since it is at its expense that the coverage of the cost of labor remuneration of personnel is formed, and the balance is the businessman’s net profit.
A close but not identical term is . The difference with marginal profit is that non-manufacturing costs are also taken into account, and it is also calculated per unit of output. Marginal profit takes into account the entire range of manufactured goods, thereby characterizing the overall profitability of the enterprise.
The word "margin" is sometimes used in professional slang to refer to marginal profit itself, but more often it means the indicator of marginal profitability (it is calculated as a percentage).
NOTE! The growth of marginal profit means an increase in the net profit of the enterprise due to faster recovery of variable production costs. It is the increase in marginal profit that is the goal of various management strategies used to increase the profitability of production.
Formula and subtleties of margin calculation
Based on the definition of margin, it is calculated using a simple formula:
P margin. \u003d V p - R lane.
- В р - the amount of proceeds from sold goods, services, works;
- R per. - variable costs.
When calculating marginal profit, it is important to remember some accounting features:
- The revenue for this formula is taken excluding VAT and excises.
- Variable costs are those costs that are directly related to the volume of products produced and the quantity sold.
- If in some accounting period the product was not sold or produced, which means that at that time the organization did not incur variable costs.
- Variable costs do not react in any way to changes in pricing policy, expansion of the range, technological modernization and other factors. Only the volume of production and/or sales is decisive.
Calculating margin - an indicator of marginal income - is convenient for comparison with other financial categories, data on various types products or figures shown by other companies. The margin is calculated as follows:
M = P margin. / V p x 100
- M - margin;
- P margin. – marginal profit;
- В р - the amount of proceeds from sold goods, services, works.
This indicator highlights the percentage share of marginal profit in sales revenue.
How to Interpret Marginal Profit
Marginal profit is needed to determine the break-even strategy of the enterprise. You can do it for each type of product from the range and for the entire production as a whole.
breakeven- such a state of production (output volume) in which the amount of revenue and costs (variables plus constants) balance each other. This volume can be calculated like this:
V without. \u003d P c o nst / (C unit - R lane)
- V without. - the volume of goods that ensures break-even production;
- P c o nst - fixed costs (total amount);
- C unit - the selling price of a unit of output;
- R per. - the cost of 1 unit of goods sold (variable costs per unit of output).
In other words, the amount of break-even depends on what proportion of the "coverage amount", that is, marginal profit, will cover the fixed costs for each unit of production.
In addition to the break-even analysis, the margin indicator is used when:
- development of a management strategy for making decisions regarding the range;
- forecasting the activities of both your company and competitors;
- pricing policy planning.
Profit Margin Rates
generally accepted normative values margin obviously cannot exist. This figure is highly dependent on the industry. Therefore, it makes sense to consider the norms only in an industry context. For every industry there are products with higher and lower margins.
REFERENCE! The production and sale of luxury goods, for example, will have a higher margin than goods that are needed on a daily basis.
Ways to influence the growth of marginal profit
- intensive way increase in marginal profit - accounting for the category of marginality within the same industry.
- extensive path influence on the growth of the margin - an increase in the price of the goods, as a result of which the margin percentage will increase in revenue. Sometimes, in order to maintain or even increase the volume of sales, companies may offer, together with the goods Additional services service or other bonuses.
Low-margin products receive a limited trade margin when sold. But you can influence the ratio of marketing of low- and high-margin products by paying more attention to advertising the latter, providing them with additional discounts, bonuses, and other ways to increase sales.
For example, in the pharmaceutical industry, dietary supplements and cosmetics are more marginal than commonly used ones medicines. Raise the margin above the level set by the state, pharmaceutical companies not entitled. But they can advertise dietary supplements more, encourage employees who provide a high level of sales, negotiate with doctors who will recommend them to their patients, and use other marketing moves. So you can influence the ratio of sales of high- and low-margin product groups.
ATTENTION! In practice entrepreneurial activity it makes sense to intelligently combine both of these methods of increasing marginal profit.
Limitations of Margin Analysis
The method of analysis and forecasting, which is based on the marginal profit indicator, cannot be 100% effective. Some restrictions are imposed on it, due to the economic meaning of the concept of margin. So, when analyzing the profitability and profitability of an enterprise using margin calculation, the following nuances should be taken into account:
- Even with constant production costs market price goods can change dramatically for various reasons, while even an increase in output will not affect the real indicator, in contrast to the calculated one.
- Fixed and variable costs may change places from time to time, which will distort the calculated margin figure.
- Other variables are not taken into account, in addition to the volume of output, which can also affect the implementation, and hence the marginal profit: such as technological characteristics, changes in wages, staff productivity, etc.
- The margin calculation method implies that all manufactured products were sold, and this is not always the case.
Profit (P) is the difference between the income from the sale of a product and the cost of its production. This is the most important economic indicator, which reflects the efficiency of economic activity of enterprises. Let us consider in detail its types and methods for their calculation.
This is the amount received after subtracting costs from revenue (B). The general calculation formula will look like this:
Profit = Revenue - Costs (in financial terms).
What is net profit (NP)
These are the funds remaining from the balance sheet profit after deducting taxes, fees, deductions to the budget. PE is used to invest in manufacturing process, organizing reserve funds, increasing . Its size depends on several factors:
- tax burden on the organization, additional payments;
- In enterprises;
How to Calculate Net Income
To do this, you must first perform the following operations:
- Add up all costs.
- Determine the gross income (AR).
- Now we can calculate the PE. The formula looks like this:
What is Gross Profit (GRP)
This is the difference between the amount from the sale of the product, and its cost. The difference between gross and net is that the first is received before the deduction of mandatory contributions. It does not include the cost of repaying defined benefits.
There are two categories of factors that influence the volume of GDP. The first includes those that depend on the head of the organization:
- growth rates of production volumes;
- the effectiveness of the sale of goods;
- expansion of the range;
- implementation of measures aimed at improving quality;
- cost reduction;
- effective marketing campaign.
External factors that cannot be influenced include:
- location;
- environmental conditions;
- current legislature;
- government measures to stimulate business;
- political, economic situation in the state and other world powers;
- external factors affecting the provision of the enterprise with resources and transport.
The formula for calculating VP is simple. To get its value, it is necessary to subtract from the net income (NV) from the sale the cost of goods or services rendered:
VP \u003d BH - C
The NR is the total revenue (TR) from sales minus the amount of discounts provided and returned products.
What is marginal profit (MP)
This is the difference between the funds from the sale and variable costs (PV) - the cost of raw materials and materials needed for production, employee salaries, electricity. MP allows for easy production. The indicator is also considered part B, from which the PE will be formed directly and fixed costs will be repaid.
Marginal analysis of manufactured products allows you to determine which products are the most profitable and which are not profitable to produce. The two main indicators that regulate the amount of MP are price and variable costs. To increase it, you must either sell goods at a higher price.
MP=OD-PZ
What is operating income (OP)
This is the amount remaining after deducting depreciation deductions, rent, payment for fuel and lubricants and other current expenses from P. The OP does not exclude funds for tax deductions and loan overpayments.
It is calculated according to the following formula:
OP \u003d VP - KR - UR - PrR + PrD + Prts,
where:
KR - business expenses(R);
UR- managerial P;
PrR- other R;
PrD- income;
Prts- interest.
OP allows you to view a set of costs and revenues of the enterprise, at the same time making it possible to evaluate in detail the most profitable or unprofitable budget columns.
What is book profit (BP)
This is the total P of the organization, fixed on its balance sheet for a specific period of time. Combines income received from all types of production and non-production operations. It is a PE before the transfer of taxes and other established payments. The BP indicator reflects the effectiveness of the enterprise's strategy and the effectiveness of the decisions made by the management.
To assess the implementation of the plan and compare with the indicators for the previous period, a balance analysis is carried out. This is necessary in order to establish the reasons for the non-fulfillment of the plan, identify shortcomings in the management system, find sources of losses and generate resources to increase profits.
The main elements forming the BP are:
- income or damage (D / D) from the sale of goods;
- D / C from additional implementation;
- D / C from non-operating activities.
Balance sheet profit is obtained from operating or vice versa. The formula looks like this:
BP \u003d OP - Prts,
where:
Prts - interest.
General concept of revenue
These are proceeds from the sale. The activity of any enterprise is concentrated on obtaining it. The difference between B and P is that profit is the difference between the revenue received and the costs incurred. B can come from several sources:
- sales;
- implementation;
- investments;
- implementation of financial transactions.
Total B is calculated by adding the funds received from all sources.
What is Gross Revenue (BB)
This is the total amount of funds received from the sale. Determined by the formula:
BB \u003d Quantity of goods produced (T) * Price T.
It is not a decisive indicator, as it does not include the costs incurred. It cannot be considered as a separate element for assessing the performance of the organization.