/ / What is the company's profit margins

What is the company's marginal income

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

This indicator is quantitative,is 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 by twoways. 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 marginalcosts. 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 revenueis determined by means of 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 sales revenue 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 exceedfixed costs, then we can say that the proceeds from the sale 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, thus, along withincome 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.

Determining the outcome of the activity givesthe ability to determine the amount of profit that characterizes the total sales of products. These data make it possible to make decisions with regard to supply, further production volumes and marketing of the products.

Method of calculating the financial result usingthe indicator of marginal revenue is called a tool for prospective analysis. In this case, the amount of sales proceeds is only compared with the variable costs for a certain type of product. The 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 the cost coverage, 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 ofa number of strategic decisions on the conduct of production policy. 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, the margin income determines, in general, the effectiveness and efficiency of the enterprise.

Read more: