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Marginal profit(MP) is the difference between income received and direct expenses:
MP unit pr = C - PZ,
where MP unit pr is the marginal profit per unit of production;
C - price;
PZ - direct costs per unit of production,
or for the product as a whole:
MP pr = V * MP unit pr,
where MP pr is the marginal profit of the product;
V - output volume.
Marginal profit is often defined as the difference between income received and variable expenses. This definition is more convenient for calculations based on calculations and determining the break-even point. The differences between direct and variable costs are discussed in one of the sections of management accounting.
Marginal profit is understood as the marginal profit (from the English. marginal) the profit that an enterprise can receive from the production of products. Sometimes the marginal profit is called the covering contribution (from the English. contribution), implying coverage of overhead costs. IN English language the concepts " margin», « margin profit», « contribution", Sometimes " gross profit" In Russian, the concepts of “gross profit”, “coverage”, “margin”, etc. are also used.
The total amount of marginal profits for all types of products is the marginal profit of the enterprise:
MP total = Σ MP pr.
Part of the marginal profit goes to cover overhead (indirect, indirect) costs.
Enterprise profit (P) is the difference between marginal profit and overhead costs:
P = MP - HP,
where HP is overhead.
When analyzing by marginal profit, it is taken into account that the total amount of overhead costs is covered by the amount of marginal profits by product. Reducing the volume of output of products with a positive marginal profit leads to a decrease in profits.
Profit by type of product in the traditional approach is determined by the formulas:
With unit pr = PR + D nr,
where C unit pr is the cost per unit of production;
PR - direct costs;
D nr - share of overhead costs;
P = V (C unit pr – C unit pr),
where V is the volume of output;
C ed.pr - unit price.
The share of overhead costs is determined in such a way as to distribute the volume of overhead costs over the entire volume of production in proportion to some indicator (for example, in proportion to the basic salary or volume of production in physical terms):
D nr = V nr / V,
where D nr is the share of overhead costs;
V nr - volume of overhead costs;
V - output volume.
As output decreases, semi-fixed costs do not change (or change slightly), so the share of overhead costs increases. Therefore, a reduction in the output of one type of product leads to an increase in the cost of other products.
This is shown in the profit and loss account as follows:
The term “operating profit” refers to profit from current operations (core activities).
Profit for the enterprise as a whole is formed from profit from production and profit from the sale of many types of products, combined into various product groups and produced in various workshops (Fig. 3.3).
Rice. 3.3. Hierarchical model of marginal profit formation.
In this regard, it is appropriate to build a system for calculating marginal profit according to the hierarchy, highlighting direct and indirect costs of a product, product group, workshop, and enterprise.
Marginal profit by type of product:
MP pr1 = D pr1 – PR pr1,
where D pr1 is the income of product 1;
PR pr1 - direct costs of product 1;
MP pr1 - marginal profit of product 1;
MP pr2 = D pr2 – PR pr2,
where D pr2 - income of product 2;
PR pr2 - direct costs of product 2;
MP pr2 - marginal profit of product 2;
MP tg = Σ MP pr tg – KR tg,
where MP tg is the marginal profit of the product group;
Σ MP pr tg- the amount of marginal profits of products of this product group;
KR tg - indirect costs of the product group;
MP c = Σ MP tg c – HP c,
where MP c is the marginal profit of the workshop;
Σ MP tg c- the sum of marginal profits of product groups produced in the workshop;
HP c - overhead costs of the workshop.
MP total = Σ MP c – HP total,
where MP total is the marginal profit of the enterprise;
Σ MP c- the amount of marginal profits of workshops;
HP total - overhead costs of the enterprise.
And calculation full cost, and the calculation of marginal profit ultimately give the same profit value.
1. Traditional approach (at full cost):
Enterprise profit = Sum of profits by product,
Product profit = Price - Cost,
Cost = Direct costs + Share of overhead costs.
2. Calculation of marginal profit:
Enterprise profit =
= Marginal profit of the enterprise - Overhead costs,
Marginal profit of the enterprise = Sum of MP by product,
Product MP = Price - Direct costs.
Each method has its own advantages and disadvantages. A comparison of profit calculation methods is presented in table. 3.4.
Table 3.4. Comparison of profit calculation methods.
Advantages |
Flaws |
|
Profit with overhead sharing |
|
|
Marginal profit without overhead allocation |
|
|
Not all entrepreneurs who opened production studied at economic faculties. But sooner or later everyone comes across such a concept as “marginal profit”. What exactly is this concept and by what method it is calculated, we will discuss below.
Marginal profit (MP / coverage amount / margin) is the difference between sales revenue (excluding VAT) and the company’s incurred variable costs, which means the share of expenses for the purchase of raw materials and production materials, employee salaries, public utilities. MP directly depends on market conditions.
If sales volume covers the enterprise's expenses without increasing the level of revenue, then marginal income is equal to fixed costs and the enterprise is in . If production profit exceeds all variable costs, we are talking about the appearance of marginal profit.
The MP value shows what maximum profit can be implemented by the enterprise. The bottom line is that the lower the indicator variable costs, the higher the marginal income, which means the greater the organization’s ability to cover its own costs. Therefore, the development of mass production and large-scale sales volume is the goal of any business.
MP = D – PZ;
MP – marginal profit,
D – total income,
PZ – variable costs.
In addition to calculating the MP for the entire production volume, there is one for each product separately. It helps identify economically unviable products. The structure of the formula is as follows:
MPed = C – C;
MPed – marginal profit of a single product,
C – selling price,
C – cost.
Example. The company produces cheese of three different brands: “Russian” (price 1 kg – 900 rubles, cost – 750), “Sovetsky” (price 1 kg – 1200 rubles, cost – 900) and “Domestic” (price 1 kg – 800 rubles, cost price – 950). It is necessary to calculate the MP for each of them and determine which cheese is not suitable for production.
MPed (Russian cheese) = 900 – 750 = 150
MPed (Soviet cheese) = 1200 – 900 = 300
MPed (Otechestvenny cheese) = 800 – 950 = -150.
Conclusion: A negative marginal profit indicator indicates that the production of Otechestvenny cheese is inappropriate. The remaining cheeses meet the “norm” criterion.
Managing a company requires the entrepreneur to have professional erudition and a lot of time. The entire production process falls on his shoulders, in which the strengths and weak sides sometimes it becomes almost impossible. Analysis of marginal profit allows you to assess the situation in production, track the dynamics of production of a specific product, and make a forecast for the coming years. The “viability” of the entire business depends on how revenue indicators are checked.
Margin is considered as a key factor in pricing and profitability of marketing expenses. It reflects as fully as possible the difference between cost and As a rule, margin is expressed 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 company’s variable costs. It's called "gross margin." Based on it, it is impossible to assess the general state of finances in the enterprise or a specific area of activity. However, this indicator is used in calculating a number of other quantities. For example, its ratio to the amount of revenue forms the gross margin ratio.
The difference between total sales profit and variable costs is the basis for determining the company. Thus, gross margin is considered as analytical quantity, which characterizes the result of the organization’s activities as a whole. This indicator is formed on the basis of employee labor invested in the production of products (provision of services).
Marginal profit (from English:marginal revenue) is the difference between income from sales or sales of products and various variable costs. In this case, income is considered as the company's sales revenue excluding VAT. As for variable costs, everything is quite simple here; from the final cost of the product, the enterprise calculates: the cost of electricity costs, wages of working personnel, the cost of raw materials, fuel, various unforeseen financial investments, etc.
Undoubtedly, margin is the main indicator of the capacity potential of an enterprise. The higher it is, the more there is financial resources to pay off variable costs, which increases the potential for the production plan.
It is quite profitable to produce large quantities of goods, since with large-scale production the cost of goods is reduced, which allows you to have a large marginal profit. This pattern in economics is called “economy of scale.” We'll talk about it later.
In business and retail, this concept is quite widespread. This is due to the fact that retailers can change the price of goods during market instability. Because in the laws Russian Federation There is no mention of a penalty for exceeding the margin rate. Permissiveness is restrained only by competition. When there is a shortage of goods, the margin tends to increase. This is a natural response of supply to demand.
Margin in retail- the main income of businessmen. They form the final cost of products on the market.
Gross marginal profit includes two fundamental indicators - revenue from sales of goods and variable costs.
As you know, margin is the difference between income and variable costs. Below you can consider the formula by which you can calculate the marginal profit.
Marginal profit = “price” minus “variable costs”.
The formula can be seen below.
Marginal profit per unit:
“Price” minus “Cost”.
For example: the price per liter is 50 rubles, and the cost is 20 rubles.
Calculation: 50-20=30,
30 rubles - marginal profit per unit of goods.
To find the total marginal profit, subtract variable costs from this cost (30 rubles).
If your income only covers the final expenses of the manufacturer, then it is at the “point of hopelessness”.
Marginal profit analysis is needed to calculate the critical volume of output that can cover variable costs 100%. It is quite common to call this the break-even point. It provides a guarantee for the feasibility and profitability of production.
The demand for products and the costs of their production are the main criteria for marginal analysis. When calculating it, all factors are taken into account, the influence of which may primarily affect the price. After all, price is the overwhelming criterion for selecting manufactured products on the market. It is a guideline for the buyer; the demand for the product and the success of sales depend on it.
Analyzing the technological capabilities of the enterprise, its payment tariffs wages, fixed and variable costs, taxes and various deductions, it will be possible to formulate the profitability of product production and set the minimum amount of output at which the manufacturer will make a profit.
If the marginal profit is equal to the cost of production, then the profit is zero.
Over the past 15 years, a list of products that have a biased margin percentage has been formed.
Every businessman is interested in creating a business with maximum foreign exchange returns. Of course, no one wants to get involved in a business that will not generate profitable income. Also, no one wants to go into the red. For this purpose, products or offers are classified into:
What is a high-margin product? There are a number of reasons why this product is overpriced:
There are also high-margin service sectors: cafes, restaurants, etc. Institutions of this type have a high margin percentage (100-200%). In a restaurant, for example, you can sell one bottle of wine, which costs about 1,000 rubles, for 3,000 rubles. The price, as a rule, depends on the status of the establishment and the quality of services. But strangely enough, the demand for these services is growing over time.
Medium-margin goods. These products are often not for everyday use. The margin on them is less than on high-margin ones. Such products include: household appliances, Construction Materials, various tools, electronics and even cars.
Sales representatives typically set a margin of 30-40%. The products presented also have some seasonality, but it is not so great as to be considered.
In business, this niche brings good income, since the balance between price and supply increases the number of sales.
Low-margin goods. As a rule, these are goods of everyday use, such as: household chemicals, non-food products, children's products, etc.
The margin on these goods cannot be higher than 10-20 percent. The benefit from sales of this group of products is due to high turnover.
As for the service sector, according to research data, the lowest income belongs to transportation- no more than 20%.
To date, the state has not yet established the maximum allowable margin for goods and services. That's why price policy stable only due to market competition. And exceeding the price limit entails the loss of the most important component of market trading - the client.
It is most profitable to buy medium-margin and low-margin goods from wholesalers or close to production, if you have such an opportunity. The higher the wholesale purchase, the big discount provided by the manufacturer or distributor. As a result, the amount saved partially or fully compensates for transportation or other costs, which reduces its cost.
IN harsh conditions market economy the formation of the price of a manufactured product is influenced by many external and internal factors. Government policy is not always aimed at improving pricing for common market. Increasing tariffs and taxes entails a very large increase in the price of products. Therefore, production facilities are trying to put only some types of goods into large-scale production. This allows you to compensate for all fixed and variable costs and receive a large marginal profit. This is called “economy of scale”.
But the situation is worse with those goods that, although they have demand in the consumer market, are not very high. It is not profitable to place such goods on a large production flow, since wholesale purchases are very small. Manufacturing can only be rational if its cost is high, since all taxation costs and production costs will be taken into account. Such a product is considered high-margin.
There are criteria by which a product is considered profitable for large-scale production:
Compliance with the conditions guarantees that the product will be consistently sold on the market, because it is stability that makes it clear that the product can be put into production by default. The demand for it will not fall for a long time and with this you can make long-term plans for business diversification.
An important factor in rising product prices is variable costs. After all, they make up 40% of the cost of production. Reducing payments on them will reduce the final cost of the product and increase the margin.
Variable cost reduction methods:
Concerning positive side margin, it, like any other economic value, is beneficial only for sales representatives. Since the state has not approved the maximum permissible margin interest rate. A good opportunity for those who want to create a high-margin product or service.
The other side is consumer, since the buyer always has to overpay for the product. And it is unlikely that he will ever be able to find out the real cost of the goods. This could become a kind of consumer revolt that will provoke a decline in interest rate margin. This benefits no one.
Increasingly, consumers are receiving requests to the Ministry of Finance to distribute the maximum allowable margin for each type of product and service. A reform of this kind will make it possible to stabilize prices, expand the number of points of sale of goods, and significantly reduce the price of high-margin products.
The state apparatus in Russia does not interfere in the market economy as long as the business is not a monopoly. If the enterprise has grown to such a scale that there are no competitors left in terms of market shares or production volume, the antimonopoly committee comes into play. This government structure was created in order to restrain the ardor of a monopolist in a market where there is no competition for him.
If a monopoly begins to raise prices without good reason, the antimonopoly committee may appeal to Supreme Court. Responsibility for non-compliance with the rules may be as follows:
If a monopolized market belongs to one or two companies, the marginality of products and services on it is weakly related to the laws of a market economy. Consumers have no other choice but to use the goods or services offered by the monopolist. An example is the above-mentioned mobile market software, 80% of which is occupied by Google with its operating system"Android".
Competing with a monopolist is often pointless. A new player who wants to win market share must have almost unlimited cash injections, which will be aimed at reducing the cost of products or services for the end consumer. This must be done so that the new supply can compete with the monopoly on price. Obviously, in such situations, the new player has to work at a loss for years. Sometimes decades. Until the market share will provide exponential growth. This requires a huge amount of resources, so it is difficult to compete with monopolies. The only way to exist in the same market with large corporations is through the activity of the antimonopoly service or moving into other niches, meeting the needs of the audience in new ways or targeting a different target audience.
Marginal profit is the difference between the proceeds from the sale of products that were produced by the enterprise and the costs that arose as a result of the creation of these products.
Very often it is also called the coverage amount. 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 permanent profit. That is, if the marginal income (profit) is higher each time, this means that cost recovery will be carried out faster, and the company will receive net profit more.
In the Russian Federation, the term “marginal profit” is not used so often. With some 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 between them.
Gross income is calculated using non-productive and production costs, but in the marginal approach they are considered more elastic. Moreover, 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 exact information about how much profit each unit of output brings to the company.
At the same time, 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 between them, which experts in this field know about. As a rule, on the territory of the Russian Federation, marginal income is used in market and production sector entrepreneurship, because this is where it brings maximum results.
If the analysis of marginal profit shows that the enterprise’s income covers any variable costs well enough, we can say that the profit here exists at a high level. In this case, in the analysis process 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.
As a rule, it primarily depends on the variables on modern market indicators.
These are the costs of producing one unit of goods and the price at which this product can be sold.
In practice, the profit margin can increase. How to get more income?
Firstly, you can mark up your product range 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 implement them.
First of all, this is explained by price competition, which nevertheless dictates its own conditions in setting the price for a particular product. Sometimes it happens that there is no way to raise the cost of products higher. Also, cost limits are often determined by the state, especially for essential items. Moreover, it often happens that a large number of Cheap products on the market bring a decline in their quality. This, in turn, may lead to a lack of demand for it.
When a company produces several products at the same time, then contribution margin and its calculation are a very important part of operational analysis. It should also be remembered that the larger volume of products a company produces, the less costs it will receive per unit of goods. It works the other way around too. Since this necessarily includes the calculation of such fixed costs as renting premises, paying taxes, and so on, the marginal profit, the formula of which
shows how much should cover production costs. In this formula, MP shows marginal profit, PE shows the net profit of the enterprise, and Zper is variable costs. If your income just covers the company's costs, then it is at the "break-even point."
First of all, this formula will allow you to understand which product you produce is the most in demand on the market at the moment. It is on its production that you need to focus in order to get enough big income. By calculating the marginal profit for each type of product, you can get an almost complete picture of the productivity and profitability of your company.