Marginal profit

Margin is seen as a key factor in the formation of prices, profitability of marketing costs. It fully reflects the profitability of sales, being the difference between the cost price and the selling price. Typically, the margin is expressed as a profit per unit of goods or as a percentage of the selling price.

There is an indicator that characterizes the difference between the total revenue from the sale of goods and the variable expenses of the company. It is called "gross margin". On its basis, it is impossible to assess the general state of finances in an enterprise or a specific line of business. However, this indicator is used in the calculation of a number of other quantities. So, for example, its ratio to the amount of revenue generates a gross margin ratio.

The difference between total sales profit and variable expenses is the basis for determining net profit in the company. Thus, gross margin is considered as an analytical value, which characterizes the result of the organization as a whole. This indicator is formed on the basis of the labor of employees invested in the production of products (provision of services).

Gross margin reflects the surplus goods generated by the company in cash. In this indicator, in addition, can be taken into account the income from non-operating business operations of the organization. To non-operating profit are the balance of operations to describe the creditor and receivables, the implementation of activities within the housing and communal sector of the economy, the conduct of transactions for non-industrial services and others.

Marginal profit is the difference between the income from the sale of goods produced by the organization (excluding excises and VAT) and variable production costs. Sometimes this indicator is called the amount of coverage. In this case, the marginal profit is considered as a part of the proceeds, which remains to generate profits and reimbursement of fixed expenses. The higher the amount of coverage, the faster the costs will be recovered, the higher the income that the enterprise will receive in the end.

Marginal profit (TRm) can be calculated per unit of produced and sold goods. Such a calculation makes it possible to obtain information about the increase in income due to the manufacture of each new unit of production.

Marginal profit. Formula

TRm = TR - TVC, where the variable costs are TVC, the total revenue is TR.

If the sales volume reimburses all the costs of the enterprise, then no income is provided, then the marginal profit is equal to the constant expenditure.

Revenues from the sale of goods may exceed variable costs. In this case the marginal profit has a certain size.

When the company is engaged in the production of a wide range of goods, this indicator can identify the most promising types of goods in a profitable way . At the same time, unprofitable (or unprofitable) goods for the enterprise are also determined. In other words, it becomes possible to identify which of them make the greatest contribution to the income of the enterprise as a whole, and which bring the greatest loss. To do this, determine what percentage is the marginal profit in income for each type of product.

The value of the calculation depends on the variable costs and prices - quite variable values. As practice shows, to increase the indicator of this income, you should either increase the markup on the product, or realize its greater volume, and ideally - implement both.

Thus, marginal profit should be regarded as a constant profit and expenses, a contribution to the formation of net income and compensation of fixed costs.