Marginal profit is revenue minus costs. What is the marginal income of an enterprise

In the process of financial and production planning of an enterprise for the future, the determination and analysis of such indicators as the break-even level and marginal profit are of particular importance.

Break-even analysis

The break-even point is understood as the level of production (sales) at which a zero level of profit is ensured, i.e. break even implies equality of total costs and income received. In other words, this is the maximum level of production, below which the enterprise suffers losses.

The concept of the break-even point is well explained, so we will only briefly dwell on the main points of its definition. Let us dwell in more detail on the modifications of this indicator, taking into account the need to incur costs from profits and fulfill debt obligations.

As part of determining the break-even level, all enterprise costs are divided into two groups: conditionally variable (change in proportion to changes in production volumes) and conditionally constant (do not change when production volumes change).

It should be noted that the division of costs into variable and fixed, especially with regard to overhead (overhead) costs, is rather conditional. In reality, there is a group of costs that contain components of both variable and fixed costs - the so-called mixed costs. The latter relate to variable costs in terms of the share of the variable component and to constant costs in terms of the share of fixed costs.

According to PBU (accounting rules), the list and composition of variable and fixed overhead costs are established by the enterprise. In the classic version, the break-even point is calculated based on a simple ratio based on the balance of revenue, assuming zero profit. In value terms, for the production (sales) of multi-product products:

Break-even point = Fixed costs / (1 - Share of variable costs)

where, share of variable costs = Variable costs / Volume of production (sales)

In quantitative terms, for the production (sales) of mononomenclature (or average) products:

Break-even point = Fixed costs / Input per unit of output

where, invested income per unit of production = Price - Variable costs per unit of production; Fixed and variable costs are costs attributable to the cost of production.

Accordingly, the break-even level calculated in this way reflects the level of production that must be ensured to reimburse all costs that form the cost of production.

However, the break-even point, calculated according to the above classical option, does not provide a sufficiently complete picture of what level of production (sales) the enterprise needs to ensure in order to cover all the necessary costs. Indeed, in practice, an enterprise must not only reimburse production costs, but also, for example, maintain social facilities, pay off loans, etc. In order to take into account the need to compensate for all current costs, the concept of a “real break-even point” is introduced, which calculated:

Real break-even point = All fixed costs / (1 - Variable cost share)

where, share of variable costs = All variable costs / Production volume

The break-even point calculated in this way reflects the level of production that must be ensured in order to compensate for all, and not just those included in the accounting cost, the necessary costs of the enterprise. In the case of existing debt obligations that need to be repaid within a certain time frame, the enterprise must ensure the corresponding volume of production (sales) and incoming cash flows.

To take into account the need to calculate debt obligations, the concept of debt break-even point is introduced:

Debt break-even point = Volume of required payments / (1 - Variable cost share)

where, the volume of required payments = Fixed costs + Costs from profit + Current part of the debt; share of variable costs = All variable costs / Production volume

The given debt break-even point takes into account the need to cover both all current costs and settlement of current debt, i.e. most fully reflects the required level of production (sales).

In reality, when calculating the required level of production at an enterprise, it is of interest to analyze and compare all the above break-even indicators and, based on their analysis, develop appropriate management decisions.

Marginal profit

In addition to the break-even level, an important indicator for financial and production planning is marginal profit. Under marginal profit refers to the difference between income received and variable costs. Marginal analysis is of particular importance in the case of multi-item production.

Marginal profit per unit = Price - Variable costs

Marginal profit of a product = Marginal profit of a product unit * Volume of production of this product

The meaning of marginal profit is as follows. The formation of variable costs is carried out directly for each type of product. The formation of overhead (fixed) costs is carried out within the entire enterprise. That is, the difference between the price of a product and the variable costs of its production can be presented as a potential “contribution” of each type of product to the overall final result of the enterprise.

Or, marginal profit- is the marginal profit that an enterprise can receive from the production and sale of each type of product. With a multi-product production, analysis of the assortment based on marginal profit (the so-called marginal analysis) makes it possible to determine the most profitable types of products from the point of view of potential profitability, as well as to identify products that are not profitable (or unprofitable) for the enterprise to produce.

That is, marginal analysis allows us to rank the product range in increasing order of “marginal (potential) profitability” of various types of products and develop appropriate management decisions regarding changes in the product range. Supplementary to marginal profit is the marginal profitability indicator, calculated as:

Marginal profitability = (Marginal profit / Direct costs)*100%

The marginal profitability indicator reflects how much income an enterprise receives per invested ruble of direct costs, and is very indicative for a comparative analysis of various types of products. It should be noted that marginal analysis is, to some extent, a formalized approach to studying the “profitability” of producing a particular type of product.

Its main advantage is that it allows you to see the overall picture of potential profitability and compare different types (groups) of products in terms of production profitability. But to make decisions on changing the structure of output, more in-depth research is needed, mainly oriented to the future.

These are, for example, stability, reliability and the possibility of expanding sales markets even if the products are not the most profitable, the possibility of improving quality and increasing the competitiveness of certain types of products, etc. In any case, the enterprise’s efforts should be aimed at optimizing the product range, maximizing the production volumes of the most profitable products and reducing the production volumes of unprofitable types of products. The total amount of marginal profits for all types of manufactured products represents the marginal profit of the enterprise.

Marginal profit is the source of covering the company's overhead costs and profit. Then the profit that the enterprise can count on is determined by:

Profit = Contribution Margin - Overhead

That is, increasing profits is achieved by maximizing marginal profit (or optimizing the assortment) and reducing overhead costs.

In general, both break-even point analysis and marginal analysis are important tools in the process of planning production and financial flows and are increasingly used in the practice of enterprises.

The term “marginal profit” is denoted in formulas and reports by the abbreviation MR. These are abbreviations for the English "marginal revenue".

Its definition comes in two main versions:

1. Generally accepted. Marginal profit is the total increase in funds from the sale of goods. Another name for the indicator is “contribution to coverage”.
2. Rarely found in textbooks on economic theory. Marginal profit is the increase in cash from the sale of each additional unit of goods. In this case, MR is also called additional revenue or specific contribution margin.

Formulas and examples for calculating marginal profit

Marginal profit is the difference between income from the sale of a product and all costs incurred during its manufacture (purchase).

In formula form this can be represented as follows:

where TR stands for “totalrevenue” and denotes the total profit from the sale of goods,
and TVC – “totalvariablecost” (variable costs).

For example, with a production volume of 200 units of goods, the price of each of which is 1000 rubles, and variable costs, including raw materials, transportation costs and employee salaries, of 100,000 rubles, the covering contribution will be calculated as follows:

MR= 200*1000-100.000 = 200.000-100.000 = 100.000.

Thus, the marginal profit will be 100,000 rubles.

To calculate additional revenue, a different formula will be used, which has the following form:

MR = TR(V+1)-TR(V) (2),
where TR(V) is the profit from the sale of goods for a given volume of production,
and TR(V+1) is the profit from the sale of goods with the volume of production increased by one unit of production.

Calculation example: a company produces 10 units of goods at a price of 100 rubles each, the company plans to sell 11 units of goods at 99 rubles.
In this case,

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MR = 99*11-10*100 = 1089-1000 = 89.

The marginal profit will be 89 rubles.

Relationship between marginal profit and production volume

To determine this relationship, it is recommended to use the second definition of marginal profit, because it is more indicative of the dynamics of income growth.

Variable and fixed costs should be taken into account separately when pricing.

It should be noted that fixed costs are those that would remain the same if there was zero output.

These include:

• rent;
• certain tax payments;
• salaries of accounting department employees, personnel department, managers and service personnel
• payment of loans and borrowings.

The situation in which the contribution to the covering is equal to the amount of fixed costs is called the break-even point.

The increase above this indicator is called the marginal profit volume.

This value is calculated for a certain period in the future or past.

Comparison of indicators from previous years and analysis of the current market situation make it possible to predict the volume of marginal profit and its actual value with an increase in production output.

When studying the work of an enterprise, the concept of profitability is also used. It is calculated using the following formula:

R = MR/TR*100%, where R is the profitability indicator.

Comparing the profitability of manufactured products for different reporting periods allows us to see certain problems or, conversely, progress in the company’s activities.

Ways to increase marginal profit

Even people far from economics are familiar with the terms margin and profit - what is the difference between them and how to calculate these indicators? These concepts are often used as synonyms, but there are some differences between them. We tell you how important they are and why a literate person needs to know them.

The essence of the concepts of “margin” and “profit”

To better understand the difference between these concepts, you need to start by defining their content. Thus, the Russian word “profit” usually does not raise questions and is understood as a material advantage received by someone as a result of work or a transaction. In business, this is the end result of work in financial terms.

With the foreign word “margin” it is more difficult. It has roots in English and French and is translated primarily as “difference” or “advantage.” In modern accounting, the term is most often understood as the difference between the cost of production and its selling price.

Based on the above explanations of the meanings, Initially, we can conclude that these concepts are actually analogues, because profit is also the difference between the final price and cost. But in reality this is not entirely true.

Margin is the difference between cost and price for the buyer, and profit is the material benefit of the entrepreneur.

How to distinguish between margin and profit: calculation formulas and main features

What is the difference between margin and profit? We have already found out that margin is the difference between the cost and the price for the buyer, and profit is the material benefit of the entrepreneur. But how can this be explained even more simply? First, let's study the formulas by which the coefficients in question are calculated.

Margin formula: what you need to know to calculate

Margin is calculated using a very simple formula: enterprise revenue minus production costs. That is, if the company’s revenue after selling products was 10 thousand rubles, and its cost was 6 thousand rubles, The margin is calculated as follows:

• 10,000 - 6,000 = 4,000 rubles.

• (4,000/10,000) x 100% = 40%.

The concept of margin is much closer in meaning to gross profit. Gross profit and margin are actually calculated the same way, as the difference between proceeds and cost. However, it is necessary to distinguish the concept of “net profit”, the difference between which and the margin is more significant.

Net profit formula: how to calculate and not get confused

Calculating profit is somewhat more complicated, since it represents the final material result, the final monetary benefit that the entrepreneur will receive after selling the product and paying all associated costs.

To find out profit, you need to subtract from revenue:

• cost price;
• management costs;
• business expenses;
• tax deductions;
• interest for payment on loans and borrowings (if any);
• any other expenses related to the activities of the enterprise.

Let's return to the previous example. The revenue is 10 thousand rubles, the cost is 6 thousand, but the entrepreneur must pay the bank 5% of the transaction (of all proceeds) and pay 500 rubles to the manager, whose work was not included in the cost of production. Then the net profit will be equal to:

• 10,000 - 6,000 - (10,000x5%) - 500 = 3,000 rubles.

It turns out that the profit from the transaction is less than the margin by a whole thousand rubles. It is clear that we present the most simplified calculations that allow us to clearly depict what this or that indicator is. In practice, all calculations are much more complicated, and the values ​​of expenses in the profit formula may not be so obvious.

In practice, all calculations are much more complicated, and the values ​​of expenses in the profit formula may not be so obvious.

The essence of the differences between margin and profit

Profit is the final, total value of the funds received by an entrepreneur after selling products and paying all associated costs. It is this indicator that records how successfully a business is running.

The margin shows what percentage markup the company makes on its products and thus allows one to draw conclusions about the profitability of the entire organization’s work. The funds received by the enterprise in the form of margin can be used to develop the business.

Related concepts: contribution margin

So, we have explained in accessible language the difference between margin (gross profit) and net profit. But along with these concepts, the combined term “marginal profit” is often used. What is it and how does gross profit differ from marginal profit?

This is how we call the difference between the proceeds (revenue) and the manufacturer’s variable costs, that is, all the funds spent on producing a specific volume of products. Variable costs include:

• purchase of raw materials and components, without which it is impossible to manufacture products;
• payment of energy and utility costs;
• remuneration of employees involved in production.

Fixed costs are not included in the calculation of marginal profit- interest on loans, property taxes, depreciation payments, rent payments, management salaries. Thus, marginal profit shows how much money the sale of products brought, taking into account the costs of its production, but does not characterize how much net profit the enterprise will receive.

What else you need to know about margin and profit

After reading all the previous paragraphs, it is easy to see that the difference between the concepts is quite simple and can be perceived even by people far from economics. But to entrepreneurs, all the reasoning may seem obvious. However, let's take a deeper look at what else characterizes these concepts:

1. Both indicators can be measured either in specific values ​​(in monetary amounts) or in percentages, but margin is more often measured in percentages, and profit in monetary terms.
2. The coefficients are related to each other in direct proportion: the greater the margin, the greater the profit.
3. The margin will always be greater than profit, since the second is one of its components.
4. The meaning of terms may vary depending on the area in which they are used. So in the field of exchange transactions, margin is the collateral that is paid for a loan, the funds of which are planned to be used in an exchange transaction.

Why calculate these coefficients?

Now let’s look at the final question - why calculate these coefficients at all and why can’t we limit ourselves to calculating revenue and net profit? Knowledge of both indicators - margin and profit - will help an entrepreneur fully evaluate the results of work and the ratio of funds earned to expenses incurred. The coefficients allow us to judge the efficiency of resource use, the correctness of pricing and the overall results of the enterprise’s work within a specific time cycle.

Marginal profit- this is the difference between the income received without tax at the enterprise among variable costs, including the cost of purchasing raw materials, paying staff, spending on gasoline and servicing the company.

The increase in profit margin depends on the expansion of the company; the wider the range of expansion, the lower the costs. This is explained by the fact that as the value increases, the initial cost of the manufactured product decreases.

What is the economic sense?

Marginal profit will be able to show what the best results the company can count on. The more significant the income, the better the costs are covered.

In another way, marginal profit is called the covering contribution. The marginal profit ratio itself is used to assess how much profit can cover the costs of the entire product as a whole, and for one item.

Methodology for calculating a company's marginal income

Marginal profit is divided into two indicators: revenue from sales of goods and variable costs.

Revenue - Variable Costs = Contribution Margin

Officially, the formula looks like this:

MR=TR-TVC

MR – marginal profit,

TR – income from the sale of goods,

TVC – variable costs.

Example:

When producing 200 pieces of any unit of goods, the amount of each is 1000 rubles. Variable costs, which include production costs, transport maintenance, wages, etc., amount to 100,000.

How to calculate gross contribution margin?

M.R.=200*100-100.000=100.000 is the marginal profit of production.

Marginal profit nomencl. = Price - Cost;

Official wording:

MR=TR(V+1)-TR(V)

TR(V+1) is the profit received from the sale of goods,

TR(V) is the profit received when selling with an increase of one unit of production.

Here's an example:

When producing 10 products costing 100 rubles, the company decided to produce 11 products and sell them for 99 rubles.

MR = 99*11-10*100=89 rubles

This calculation allows you to exclude unprofitable products from production, and also helps to make changes in the sales of unprofitable products.

Marginal profit and other types of company income

To determine the relationship between marginal profit and the volume of goods produced, when forming pricing, you should separately take into account variable and fixed costs.

These include:

• rent,
• tax,
• staff salaries,
• loan payments;

Break even– this is equally the ratio of the contribution of the coverage to the fixed costs. Anything that rises above the norm is called the marginal profit volume.

Analysis of the company's marginal profit

An analysis of the company is carried out to determine the critical volume and to determine the coverage of variable costs with the help of trade items sold.

Margin analysis is required:

• with limited capital, when more efficient allocation of funds is required.
• with limited production capabilities, it is necessary to distribute the most profitable subtype of product.
• if there are doubts about some divisions of the enterprise and their effectiveness.
• with the necessary comparison of prices of the competitive side and justification of the pricing policy of production.

What does the analysis of the marginal profit of an enterprise give?

• calculation of break-even point,
• strict assessment of the profitability of any company product,
• assessment of decision-making when concluding additional contracts,
• assessment and decision to close the enterprise.

What is the relationship between break-even point and contribution margin?

Helps characterize the production of a zero-income product. The relationship between marginal profit and break-even point becomes clear when using the “costs minus efficiency” methodology.

Calculation of the classical point is ideal for calculating products of the same type that are close in value to the profitability and marginal profitability values. Allowable change in production volume with proportional changes for each product release.

Practice shows that such rules are most often not observed, since some subtypes of manufactured goods cannot be reduced or increased.

Therefore, the more considered term is “Overhead Boiler”, which is filled for each unit with marginal profit, that is, in other words, the company receives income only when the boiler is completely full, when the profit flows out and is collected on a separate plate.

How can you increase your company's profit margin?

In order to increase profit margins, you should focus on increasing total revenue and reducing variable costs.

Here is a table with methods to achieve increased profits and reduced costs.

Marginal income in Russia

Marginal income in Russia is calculated using this formula:

V.margin = VP - Zper VP– revenue from goods sold, Zper – variable costs.

The contribution to covering the company's fixed costs is shown by the margin. In Russia, marginal income is used in production at large enterprises, where it can bring maximum profit.

When can a company be said to have reached revenue level?

Why do you need to know what your business's contribution margin is?

Marginal profit allows you to determine which product or service contributes to an increase in profit and which, on the contrary, contributes to its decline.

Production is faced with the following issues:

• which product to discontinue and what to replace it with,
• whether to expand the sale of any product or not;

The negative aspects of this method are that it is best suited for large and established companies, where the calculation of marginal profit is very significant.

Conclusion

The article shows the different sides of contribution margin. This is of great importance in assessing the competitiveness of production on the market and its promotion in general.

By correctly applying these techniques, contribution margin allows you to increase productivity and sales, thereby increasing the profitability of the enterprise.

When compiling an income statement, an accountant traditionally calculates several types of profit: gross, from sales, before taxes and net. In management accounting, another type is used - marginal.

The formula for calculating marginal profit is simple, but its application is ambiguous. This is due to different understandings of foreign terms.

Where did profit get its name?

The indicator received the prefix “margin” due to the principle of subtraction, which is used for calculation and was originally incorporated into the essence of margin.

Margin is the difference between the selling price of a specific product (work, service) and its cost. It comes in two types:

• Absolute – in monetary terms as a financial result per unit of production;
• Relative – as a percentage of the sales price as a profitability ratio.

For example, in the banking industry, margin is the difference between interest rates on deposits and loans, and in marketing activities, it is a markup.

To calculate margin, you can use several formulas:

• Margin = (Revenue – Cost): Quantity of products sold in natural units
• Margin = Price – Unit cost
• Margin (%) = (Price – Unit Cost) : Price

What is contribution margin and how to calculate it?

Marginal profit (income) is the part of the enterprise’s net income remaining after compensation for the variable costs it has incurred. In the future, marginal profit will be used to finance fixed costs and generate profits.

The calculation of this indicator implies a mandatory division of costs into two groups:

• Variables are costs that are linearly dependent on the scale of activity (the more products need to be produced, the larger they will be);
• Fixed costs are costs whose changes do not directly depend on production volumes. They will take place even if the company cannot produce or sell anything.

The separation method is determined by the accountant based on the technological characteristics of the enterprise and industry.

To determine the total amount of marginal profit, the formula is used:

Contribution Margin = Net Income – Variable Costs

If you need to determine its value per unit of production, then use the formula:

Marginal profit = (Net income - Variable costs) : Sales volume in natural units = Price - Variable costs per unit

Marginal profit ≠ Gross profit

Many accountants, when talking about profit, equate the concepts of “gross” and “marginal”. In fact, they differ from each other in essence and in the calculation method.

Gross profit is revenue minus all production costs that relate to products sold in the reporting period.

Contribution margin is revenue minus all variable costs that were incurred to produce the products sold.

As you can see, to determine the gross financial result, you need to divide costs into production and non-production. This involves calculating the full production cost. To achieve marginal profit, you need to separate costs into variable and fixed. In this case, the variables will make up the cost of specific types of products. Constants, which depend not on the volume of activity, but on time, should be considered as period costs (not included in the cost price).

Sometimes an accountant assumes that manufacturing costs are variable and non-production costs are fixed. But that's not true. For example, production costs include depreciation and equipment maintenance costs, which are constant in nature. And non-production costs include salesperson bonuses as a percentage of sales and are definitely variable.

Therefore, in order to correctly find the marginal profit, it is important to divide all the costs of the enterprise into variable and constant parts, regardless of the stage at which they arose.

The relationship between contribution margin and profit

Contribution margin shows how much money a company has left to:

• Cover fixed costs;
• Make a profit (before tax).

Therefore, the indicator is also called coverage or contribution to coverage, which is reflected in the formula:

Marginal profit = Fixed costs + Profit

In fact, this is the upper limit of profit when the value of fixed costs changes over time, namely:

• The larger the fixed costs, the lower the profit;
• The company will incur losses if the level of fixed costs exceeds the marginal profit;
• Profit reaches its maximum when fixed costs tend to zero.

These patterns are very important for analysis in order to understand how changes in volumes will affect the financial result. Changes (Δ) of two indicators can be expressed as follows:

Δ MP = Δ BH – ΔZ AC and ΔOP = ΔBH – (ΔZ AC + ΔZ DC)

where BH is net income; Z variable – variable costs;

3rd post - fixed costs.

When the scale of production and sales changes, 3 post remain at the same level, that is, Δ3 post = 0.

Then we get a logical relationship:

ΔOP = ΔBH – (ΔZ variable + 0) = Δ MP

Conclusion: by assessing the dynamics of marginal profit, we can say how much the entire profit will increase or decrease.

Marginal profit ratio and its application

Marginal profit ratio (KMP) is the share of marginal profit in net income. It shows how many kopecks of profit each additional ruble of revenue will bring. Calculated using the formula:

(K MP) = Marginal profit: Net income

(K MP) = Variable costs per unit: Price

This indicator is important in making market-oriented management decisions. It is a constant value and does not depend in any way on the volume of activity. With its help, you can predict how much the financial result will change if sales growth or decline is expected:

ΔOP = ΔBH × K MP

For example, if at KMP = 0.3 it is planned to increase sales volume by 120,000 rubles, then we should expect an increase in profit by 36,000 rubles. (120,000 × 0.3).

The break-even point (profitability threshold) is the level of production at which the enterprise's expenses are at the level of income and profit is zero.

By lowering production below this level, the enterprise receives a loss, and by increasing it, it begins to make a profit. To find this indicator in monetary terms, use the profit ratio:

Break-even point = Fixed costs: K MP

This formula is convenient in that it allows you to calculate the break-even level of sales even for enterprises that produce a wide range of products, since you do not need to take into account the price of each individual unit.

The coefficient (K MP) will allow the company:

• Determine the critical level of production and control it;
• When planning the expansion of activities, predict changes in profit with high accuracy;
• If financial indicators are negative, calculate a new break-even point and adjust the production and sales plan.

The main disadvantage: this only works ideally when the products are fully sold, that is, there is no work in progress and no leftover finished goods at the end of the month.