What is the company's profit margin?

Marginal revenue is the difference between the revenue of an economic entity, which it receives from the products (services, works) it sells, and the total amount of its variable costs.

This indicator is quantitative, measured in monetary units. The value of the indicator reflects the contribution of the enterprise, which it can make to cover the fixed costs in order to make a profit (that is, such income directly affects the amount of real profit).

Marginal revenue can be determined in two ways. First, all direct costs and associated overhead (or variable) costs are deducted from the revenue for the realized products . Second: the fixed costs are summed up with the profit of the enterprise.

There is the concept of the average value of marginal costs. It is understood as the difference between the average variable costs and the price of the product itself. This indicator reflects the contribution of each unit of production in covering the costs of the enterprise and making a profit.

The essence of margin income, on the whole, boils down to the fact that the amount of excess of variable costs of income shows how the company is able to cover its constant costs and make a profit.

The share of marginal revenue in revenue is determined through the preliminary calculation of the margin profit ratio. This ratio is equal to the ratio of marginal revenue to firm revenue.

If the indicator is zero, then the proceeds from the sale can cover only the variable costs, that is, the enterprise incurs losses equal to the fixed costs.

If the indicator is above zero, but does not exceed fixed costs, then we can say that the sales proceeds can cover all the variables and part of the fixed costs. The loss will be less than the fixed costs.

In a situation where marginal revenue equals constant costs, revenue from sales can cover both variables and fixed costs. In this situation, the enterprise does not incur a loss.

If the fixed costs are exceeded by marginal income, the enterprise can not only cover its costs, but also profit.

The revenue margin, therefore, along with the income indicator, is the most important source of data for the calculation of threshold indicators that are used in conducting operational analysis of the enterprise and determining the financial results of its activities.

Determination of the financial results of the activity makes it possible to determine the amount of profit that characterizes the total sales of the products. These data allow making decisions with respect to supply, further production volumes and marketing of products.

The method of calculating the financial result using the marginal revenue indicator is called a tool for prospective analysis. In this case, the amount of revenue from sales is only compared with the variable costs for a certain type of product. Indicators for each type of output are calculated. The difference of these indicators expresses the share of one type of product in the coverage of costs. From the sum of all parts of covering costs, the value of all fixed costs is subtracted . As a result, the degree of participation of each product in the compensation of these costs becomes known (that is, in the achievement of profit).

Marginal revenue influences the adoption of a number of strategic decisions on the conduct of production policies. Such decisions include the following: the expediency of further promotion of a certain product to the sales markets, the need to take additional orders for production, the prospect of cooperation with each group of customers. By and large, margin income determines, in general, the effectiveness and efficiency of the company.