Net profit per unit of production. Marginal income: concept and method of calculation

The Russian microeconomics is replenished with indicators that reflect the financial result of the functioning of the organization. Such indicators are necessary in unstable market conditions, because. allow you to form a more flexible strategy and consider efficiency from different angles. One of the significant indicators in this group is marginal profit.

Marginal profit - what is this indicator and what does it characterize

The indicator reflects the financial result at the end of the period. Marginal profit is used when calculating the effect of production without taking into account fixed costs.

It characterizes the income of the enterprise after passing the break-even point. It is advisable to calculate the indicator if fixed costs are covered by economies of scale.

Marginal profit depends only on the main activity and does not fit into the Russian forms of financial statements.

Formula and Example for Calculating Marginal Profit

Marginal profit is calculated according to information from the income statement. The indicator is found as the difference between income and part of the expenses. In other words, marginal profit is the difference between revenue and average variable costs.

General calculation formula

IN general view Net income can be found using the following formula:

MP=TR-VC, Where

MP (marginal profit) – marginal profit, rub.;

TR (total revenue) – revenue, rub.;

VC (variable cost) - variable costs for the total volume, rub.

The above formula allows you to find profit on the entire volume. Sometimes it is necessary to know the margin per unit of production, and in this case, use this formula:

MP unit = P - AVC, Where

MP units (marginal profit) – marginal profit per unit, rub.;

P (price) - price of a unit of production (revenue from one piece), rub.;

AVC (average variabl ecost) - average variable costs, rub.

Balance calculation formula

Russian accounting does not allow allocating variable costs to the volume of production, therefore, for the purpose of calculating variable costs, the technological cost is taken. This cost indicator almost always consists of variable costs.

As a result of this amendment, the calculation formula is transformed:

MP = page 2110 – page 2120, Where

line 2110 - revenue, rubles;

line 2120 - technological cost, rub.

Calculation example

Ekran LLC is engaged in the production of drills for milling machines. The financial statements for the last 2 years contain the following data:

Then, as a result of the calculation, the marginal profit is:

MP 2013 = TR - VC = 115,000 - 50,000 = 65,000 rubles

MP 2014 = TR - VC = 175,000 - 70,000 = 105,000 rubles

The importance of this indicator

The indicator is significant for calculating indicators when planning production volumes. This is especially true for new activities or large investment projects.

Video - lecture "Marginal profit, break-even point and operating leverage":

Without marginal profit, it is impossible to calculate the break-even volume of production and sales in monetary terms.

The break-even point is the sales volume at which profits cover losses and profit from sales is zero. You can read more about this indicator in the article "What is the break-even point and how to calculate it". At the break-even point, marginal profit will be equal to fixed costs.

Operating leverage reflects the ratio of marginal income to revenue. In other words, the indicator expresses the share of marginal profit in total income. The operating leverage is also referred to as the profitability threshold.

Marginal profit allows you to more effectively manage costs, as it takes into account only the total variable costs. The indicator is used when producing several types of products for a rational assessment of the effect of each type of product.

Video - presentation on marginal profit:

Profit per unit of production in the traditional approach is determined by the formula:

Profit per Unit = Price - (Direct Cost + Overhead Share).

The share of overhead costs is determined in such a way as to distribute the entire volume of overhead costs for all types of products in proportion to some indicator (for example, in proportion to sales volume or the wage fund of the main workers).

Thus, the profit per unit of output depends on the chosen overhead allocation base. In addition, with a decrease in output, semi-fixed costs change little, so that 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 production of another type.

For a more correct assessment of the profitability of the assortment, indicators of the marginal profit of a unit of production are introduced:

Marginal Profit = Price - Direct Costs

and marginal profitability of a unit of production:

Marginal profitability = Marginal profit / Direct costs.

At the same time, for the profitable operation of the company, the amount of marginal profit for all types of products must cover the amount of overhead costs.

Marginal profitability has the following meaning: it reflects what income the company will receive for the ruble invested in direct production costs. For a trading company, marginal profitability is similar to the markup on goods.

The calculation of marginal profitability for several types of products of a manufacturing company is shown in Table 1.

Table 1.

The diagram (Fig. 2) shows the indicators of marginal profitability and monthly output for different types products. Products are ranked in descending order of marginal profitability. From this example, it can be seen that the main production volumes fall on products with a low level of profitability.

From the point of view of return on investment in direct costs, it is profitable to produce products with a higher marginal profitability.

But the question arises: to what level is it necessary to increase the output of products with high marginal profitability? This must be done until a level that can be sold on the market is reached.

For a manufacturing company normal level marginal profitability can be considered the level of 100-150%. For certain types of products, profitability can range from 300 to 600%. The lower limit can be considered 30-50%.

Thus, the process of optimizing the assortment structure should begin with the definition of the company's goals, and already on the basis of these goals, the most significant evaluation criteria for the company at the moment should be selected, which will give a holistic view of working with the assortment.

General principles for selecting criteria -- optimizing the production and sales of products for a limiting resource. Therefore, to manage the assortment, it is necessary to determine what is a limitation, and, based on this, form a set of criteria. And the limiting resources can be cash, production facilities, retail space, personnel.

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 revenue 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 fixed costs, 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 the marginal profit shows what maximum profit the enterprises can generate. 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 cover, and it is understood: how it affects the formation of the net profit of the enterprise and covering (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 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.

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 it is inappropriate to produce a product or group of products if their marginal profit is 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. In this example, the balance sheet of OJSC “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:

1. The company's income and costs have a linear relationship.
2. 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.
3. Enterprise productivity does not change.
4. 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).
5. 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. Internal factors include: production technology, wage rates, etc.

Relationship between break-even point and marginal profit

The break-even point is an important financial indicator of the enterprise, characterizing the critical level of production at zero profit, let's 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 possible management methods to increase total revenue and reduce variable costs.

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.

Any entrepreneurship implies the ultimate goal of making a 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 professional slang call the marginal profit itself, but more often it means the indicator of marginal profitability (it is calculated as a percentage).

FOR YOUR INFORMATION! 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:

1. The revenue for this formula is taken excluding VAT and excises.
2. Variable costs are those costs that are directly related to the volume of products produced and the quantity sold.
3. If during some accounting period the products were not sold or produced, this means that at that time the organization did not incur variable costs.
4. 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.

break even- 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

Obviously, generally accepted normative margin values ​​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

1. intensive way increase in marginal profit - accounting for the category of marginality within the same industry.

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. Pharmaceutical companies are not entitled to raise the margin above the level set by the state. But they can advertise dietary supplements more, stimulate employees who provide high level sales, negotiate with doctors who will recommend them to their patients, use other marketing moves. So you can influence the ratio of sales of high- and low-margin product groups.

2. 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.

ATTENTION! In the practice of entrepreneurial activity, it makes sense to reasonably 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:

1. Even with constant production costs, the market price of a product can change dramatically for various reasons, while even an increase in output will not affect the real indicator, in contrast to the calculated one.
2. Fixed and variable costs may change places from time to time, which will distort the calculated margin figure.
3. 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.
4. The margin calculation method implies that all manufactured products were sold, and this is not always the case.

Marginal profit

Definition

Marginal profit ( English Contribution Margin) is one of the management accounting concepts and is used in cost-production-profit analysis to determine the profitability of a particular type of product or service. This indicator can be calculated for a unit of production, for all products, as a coefficient and as a percentage.

This concept is useful in making various management decisions.

1. To answer the question of whether to sell an additional batch of products at a lower price.
2. To assess profitability with different levels business activity.
3. To select the types of products with the highest profitability. For example, if a business has the potential to produce several types of products, but has insufficient resources to produce all types, preference should be given to the types of products with the highest contribution margin.

Formula

Marginal profit per unit of production

Meaning this indicator per unit of production is calculated by the following formula.

where P per Unit is the price of a unit of production, VC per Unit are the variable costs per unit of production.

Total contribution margin

It is the difference between revenue and total variable costs.

where S - revenue from product sales, TCV - total variable costs.

Profit Margin Ratio

The coefficient value can be calculated in two ways.

The formulas given above can be transformed as follows.

The coefficient value can also be presented as a percentage. For example, a factor of 0.2 corresponds to 20%.

Schedule

The relationship between the value of the total contribution margin and the volume of product sales is shown in the graph below.

Since sales revenue and total variable costs vary in direct proportion to the level of business activity, total contribution margin increases in proportion to the growth in sales.

Marginal profit per unit, in contrast, remains the same at any level of business activity, provided that the unit price and variable costs per unit remain unchanged. The behavior of this indicator is shown in the chart below.

It should be noted that the value of marginal profit in some circumstances may take negative values.

Management accounting lectures content

This means that the proceeds from the sale of products do not even cover the variable costs incurred. If these circumstances do not stop, the company's management needs to consider the decision to stop the production and sale of these types of products.

Calculation example

LLC "Retail Fashion LTD" is a retail clothing store that sells four types of goods. Data on sales price, variable costs and sales volume in the reporting quarter are presented in the table.

Let's analyze marginal profit based on the above formulas.

CM per Unit Jeans = 85 - 50 = $35

CM per Unit Pants = 50 - 25 = $25

CM per Unit Raglan = 45 - 30 = 15 c.u.

CM per Unit Sweaters = 90 - 60 = $30

S Jeans = 85 × 2,500 = $212,500

S Pants = 50 × 1,700 = $85,000

S Raglans \u003d 45 × 3 250 \u003d 146 250 c.u.

S Sweaters = 90 × 1,300 = $117,000

TVC Jeans = 50 × 2,500 = $125,000

TVC Pants = 25 × 1,700 = $42,500

TVC Raglans = 30 × 3,250 = $97,500

TVC Sweaters = 60 × 1,300 = $78,000

TCM Jeans = $212,500 - $125,000 = $87,500

TCM Pants = $85,000 - $42,500 = $42,500

TCM Raglan = 146,250 - 97,500 = 48,750 c.u.

TCM Sweaters = $117,000 - $78,000 = $39,000

CM Ratio Jeans = 87,500 ÷ 212,500 = 0.412 or 41.2%

CM Ratio Pants = 42,500 ÷ 85,000 = 0.500 or 50.0%

CM Ratio Raglan = 48,750 ÷ 146,250 = 0.333 or 33.3%

CM Ratio Sweaters = 39,000 ÷ 117,000 = 0.333 or 33.3%

The results of the analysis of marginal profit are aggregated in a table.

As you can see from the table, the most marginal product for LLC "Retail Fashion LTD" are trousers, since they bring the maximum profit per 1 c.u. investments.

Marginal income.

Term marginal income(MD), from English. marginal revenue is used in two ways:

• Marginal revenue is the additional revenue generated by the sale of an additional unit of a good.
• Income received from sales after recovering variable costs. In this case, marginal income is a source of profit generation and covering fixed costs.

This discrepancy is due to the ambiguity of the English word marginal:

• Limiting, hence the words "marginal, marginal" - located on the border, at the limit of the generally accepted.
• Change, difference, hence the word "margin" - the difference in interest rates, etc.

The formula for calculating marginal income (marginal profit):

TRm = TR - TVC, where

TRm - Marginal income

TR - Total revenue

TVC - Total Variable Cost

Thus marginal income is a fixed cost and profit. Often, instead of MD, the term “contribution to cover” is used: marginal income is a contribution to cover fixed costs and generate net profit.

The formula for calculating marginal income does not show its dependence on fixed costs, variable costs and prices.

PROFIT PER UNIT

But in the examples of calculating marginal income, it is clear that this dependence exists.

Marginal income is especially interesting if the company produces several types of products and it is necessary to compare which type of product contributes more to the total income. To do this, calculate what part is MD in the share of revenue (income) for each type of product or product.

Marginal income and break-even point

Marginal income is equal to fixed costs at the break-even point. In other words, if the volume of sales is such that the company covers all its costs without making a profit, marginal income only covers fixed costs.

In the figure below, the break-even point is 20 pieces of the sale of a certain product.

With this volume of sales, the profit line crosses 0 and goes into the positive zone, the income line crosses the cost line and goes above the cost line, and the marginal income line crosses the fixed cost line.

Look at the Excel spreadsheet
"Breaking Point and Break-Even Analysis
with a wide range"
Profitability, Min. markup, Marginal profit, Margin of safety
Calculation and graphs