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The marginal income indicator is one of the important parameters used when analyzing the performance of production activities. The task of the accounting department is to compile calculations and identify the level of marginal revenue in order to organize the correct expenditure of budget funds. Let's look at what contribution margin is based on various examples of accounting calculations.

Marginal income is fixed costs and profit

What is contribution margin

The term "margin" is used to mean financial indicator, reflecting the level of maximum revenue received from the sale of certain products or services. Thanks to this analysis tool, the profitability of production of a certain category of commercial products or services is revealed. Thanks to the use of such tools, entrepreneurs have the opportunity to obtain information about the profitability of the enterprise.

Profit is the difference between income from sales of the enterprise's products and production expenses.

In order to obtain data that truly reflects the current state of affairs, it is necessary to correctly compile a production cost item . Contribution margin is the result of the difference between revenue and variable costs. When the level of profit exceeds variable costs, the enterprise can be called successful. Otherwise, the production of commercial products is carried out at a loss to the company.

Accounting formulas

The contribution margin formula is as follows:

V n -PZ n = MP n, where:

1. MP n– the level of marginal income from the sale of n units of commercial products.
2. V n– the level of revenue from the sale of n units of commercial products.
3. PZ n– the level of variable costs associated with the production of n units of marketable products.

In order to determine the required value, you will need information about the current income and the amount of variable costs of the enterprise. In order to calculate the total amount of revenue received from the sale of goods, the following formula is used:

N*C n = B n, where:

1. N– quantity of products sold (pieces).
2. S n– the cost of one unit of commercial products.
3. V n– total amount of revenue.

It is important to pay attention to the fact that the level of income of an enterprise is determined by the volume of products sold. This means that the level of marginal profit is calculated based on this indicator.

What are variable costs

The variable costs item includes production costs, the volume of which depends on the production capacity of the company. It should be noted that distinctive feature Variable costs are their occurrence only during the production process. This means that when this process is stopped, the level of variable expenses drops to zero.

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

The item of fixed production costs can include rent for real estate. These costs do not depend on the number of products produced and the level of production capacity. Variable costs include expenses for the purchase of consumables and raw materials that are used in the production process. It is important to pay attention to the fact that if the remuneration of hired personnel depends on the volume finished products, then this type of expense is classified as variable expenses.

The level of marginal profit is calculated based on a certain volume of goods produced. In order to obtain data on this indicator, you will need information about the cost of a unit of goods and all variable costs associated with production. Summarizing all of the above, we can conclude that marginal profit is the result of the difference in income and variable production costs.

In some cases, accountants may need to compare the profitability of different products. In this situation, specific indicators are used. The term “specific marginal profit” should be understood as “margin” from one unit of commodity output.

Please also note that the values ​​used in the calculations are absolute. This means that they are expressed in terms of monetary units. In a situation where a company produces several types of goods, marginal profit ratios are used, which are relative values.

How is contribution margin calculated?

How marginal income is calculated should be considered using practical examples. Imagine a small workshop producing three main products - plastic containers with a volume of one, five and ten liters. In order to determine the level of margin, you will need information about variable costs and income from the sale of one unit of goods from each category.

In order to obtain information about the required indicator, you will need to subtract variable costs from profit. In order to obtain the margin ratio, you will need to divide the resulting value by the information presented in the “revenue” column.

Marginal income equals fixed costs at the break-even point

Based on the table above, we can conclude that the highest marginal income comes from the production of plastic containers with a volume of 10 liters. It is important to note that the profit from this product is only 33 percent, in contrast to 1-liter containers, which brings 53 percent of the income. This means that when selling products, one-liter containers will bring significantly more income compared to other products. In this example, a specific indicator was considered, since one unit of commercial output was used in the calculations.

Next, we propose to consider examples of calculations, taking into account different indicators of production volume. It should be emphasized that in the example under consideration, an increase in production capacity led to a decrease in variable costs. In practice, this situation occurs when, for large orders, suppliers provide discounts to wholesale buyers.

In this example, contribution margin is the result of subtracting total variable costs from revenue. In this case, the contribution margin ratio will be different. As shown in the table above, the increase in production capacity led to an increase in enterprise profits and a decrease in variable costs for production.

Next, we propose to consider an example in which an enterprise has the opportunity to produce only one type of two goods within a month. In the first month, one and a half thousand 1-liter plastic bottles were produced. In the second month, a batch of one thousand 5 liter plastic bottles was produced. Our task is to calculate the profitability of production of various goods, based on data on variable costs and income from product sales.

According to the table presented above, a five-liter container brings greater profit when taking into account the smaller volume of products produced. However, containers with a volume of one liter have greater profitability. To determine the level of production profitability, a column called “coefficient” is used. The presence of such information allows you to identify which products have higher profitability and, accordingly, bring greater profits. Based on all of the above, we can conclude that the contribution margin ratio is the proportion of income received as margin.

Marginal income (profit) is the difference between sales revenue (excluding VAT and excise taxes) and variable costs

Break even

When preparing to open your own business, an entrepreneur needs to create a competent business plan. This document examines a financial model for future production, taking into account profits to cover all production costs. The term “break-even point” represents a certain amount of production capacity at which the margin will be equated to a fixed cost item.

In order to find the value of the break-even point and marginal profit, we will consider the example of a workshop producing plastic containers. In the example under consideration, the amount of fixed costs is ten thousand rubles per month. Next, you will need to calculate the break-even point when producing a product with a volume of one liter. To do this, you will need to subtract variable costs from the cost of one unit of production, and divide the resulting result by the total number of fixed costs:

(10,000 rub.)/(15 rub.-7 rub.) =(1250(units))

The result obtained is the break-even point.

In the example under consideration, the enterprise needs to establish the production and sale of 1250 units of commercial products in order to cover the cost item. It is important to note that such activities will not bring income to the company.

Volume	Fixed costs total	Variable costs	Total costs	Revenue	Marginal profit	Net profit
0	10,000 rub.	0.00 rub.	RUB 10,000.00	0.00 rub.	0.00 rub.	— 10,000.00 rub.
200	10,000 rub.	RUR 1,400.00	RUB 11,400.00	RUB 3,000.00	RUR 1,600.00	— 8,400.00 rub.
400	10,000 rub.	RUR 2,800.00	RUR 12,800.00	RUB 6,000.00	RUR 3,200.00	-6,800.00 rub.
600	10,000 rub.	RUR 4,200.00	RUB 14,200.00	RUB 9,000.00	RUR 4,800.00	-5,200.00 rub.
800	10,000 rub.	RUB 5,600.00	RUB 15,600.00	RUB 12,000.00	RUB 6,400.00	-3,600.00 rub.
1000	10,000 rub.	RUB 7,000.00	RUB 17,000.00	RUB 15,000.00	RUB 8,000.00	-2,000.00 rub.
1200	10,000 rub.	RUR 8,400.00	RUB 18,400.00	RUB 18,000.00	RUB 9,600.00	-400.00 rub.
1250	10,000 rub.	RUR 8,750.00	RUB 18,750.00	RUB 18,750.00	RUB 10,000.00	0.00 rub.
1400	10,000 rub.	RUB 9,800.00	RUB 19,800.00	RUB 21,000.00	RUB 11,200.00	RUB 1,200.00
1600	10,000 rub.	RUB 11,200.00	RUB 21,200.00	RUB 24,000.00	RUR 12,800.00	RUR 2,800.00
1800	10,000 rub.	RUB 12,600.00	RUR 22,600.00	RUB 27,000.00	RUB 14,400.00	RUR 4,400.00
2000	10,000 rub.	RUB 14,000.00	RUB 24,000.00	RUR 30,000.00	RUB 16,000.00	RUB 6,000.00

Marginal income is a contribution to cover fixed costs and generate net profit

The graph presented above clearly demonstrates that a volume of 1250 units of goods allows us to cover all production costs. In this case, marginal income is equal to the item of production costs.

Marginal and gross costs, what's the difference?

Having considered the question of how to determine marginal income, you should focus on methods for dividing costs. All production costs can be divided into two categories: indirect and direct. The last category includes all enterprise expenses associated with the production of marketable products. The item of indirect costs includes those expenses that are associated with the operation of the enterprise, but are not directly related to the manufactured products.

The item of direct expenses includes expenses for the purchase of production raw materials, wages of hired employees involved in the production process and other expenses related directly to the production process. The item of indirect expenses includes the salary of the enterprise administration, depreciation of production equipment and other types of expenses. It is important to pay attention to the fact that the difference between these costs is not always obvious, which leads to various errors in making calculations.

To control the company's activities, calculations are made of various types of margin; the indicator reflects how profitable the production of the product is. Below we will describe the formula for calculating margins in various areas.

Margin (literal translation from French - difference, advantage) is the difference between cost and price. This term is often used to replace the concept “”. The concept of “margin” is used in industrial production, banking, stock exchange operations, and trade. In the work of banks, the value determines the profitability/unprofitability of a financial transaction. Calculations are carried out to determine the gross and percentage indicators.

To facilitate calculations, financiers use a marginality ratio. It shows the profitability of the business and the success of the bank. In the financial industry, the indicator reflects the difference between lending and deposit rates. To increase deposit rates for customers, the bank raises lending rates. Otherwise, the bank will incur losses. The indicator is expressed in % and monetary equivalent. In banking, it can be 25% - the ratio of the loan amount to the collateral value. It never exceeds 100%.

There is a calculation of net margin, which shows the profitability of a business. This is the net profit that remains after paying all expenses. The operating form is calculated as the share of operating profit in the company's cash turnover.

Formula for marginal profit for banks

To monitor the success of banks, the profitability of financial transactions is calculated. There are 4 types of indicators in the work of banks:

1. The credit amount is determined as the difference in the amount specified in loan agreement and actually received by the client.
2. The guarantee is the difference between the collateral and the loan amount issued to the client.
3. Net interest form is the main indicator of the bank’s activities. When calculating the value, all assets of the financial institution are taken into account. The value is calculated using the formula:

Net interest margin = (income - expenses) / assets

In banking terminology, margin also means a secured loan. Bankers distinguish between a simple loan and a margin loan. Unlike a simple loan, a margin loan is greater than the value of the collateral. The first one is given on collateral that secures the loan amount. In the second case, the amount of the deposit smaller size loan or financial transaction. The standard share of the indicator is 25% of the loan amount.

In banking, margin is the difference in exchange rates, interest rates, and securities. The purpose of the bank's activities is to make a profit from the difference in indicators. The higher the value, the more profitable banking operations are.

Calculation of gross and percentage form

Marginality can be gross or percentage. The gross indicator reflects the performance of the company. It is formed on the basis of labor costs and the provision of services. The gross value does not include funds for rent, staff salaries, and utility costs.

Gross indicator is the difference between profit and labor costs. Gross margin shows the level of profit from . An organization is considered to be operating successfully if the gross value is 50-60%.

Experts distinguish between the concept of gross margin for Russia and in Western countries.

Formula for calculating gross margin in Russia:

Gross contribution margin = revenue – variable costs

This is the marginal profit that is used to calculate financial transactions. Marginal income does not reflect the state of the organization; it shows the costs of paying fixed costs and generating income.

Or gross margin = revenue – total cost

In Europe, the indicator is calculated in %.

Interest margin is the relationship between costs and income. The value shows the share of costs in relation to profits.

Rules for calculating margins in the video:

It is calculated like this:

Percentage margin = total cost / revenue

Or percentage contribution margin = variable costs / revenue

For Russia, margin is income, for Europe it is a percentage indicator of activity.

How is margin calculated as a percentage in the Russian Federation?

To determine the margin in % expression, the following calculation is made:

Margin = net profit / income x 100

If the value is 30%, this means that out of every ruble of income, 30 kopecks are net profit, and 70 kopecks are the company’s expenses. Margin calculation shows the profitability of the enterprise. This is an indicator of income received from financial investments. In fact, margin is profitability.

Margin ratio

The marginality ratio is the ratio of gross profit to revenue. In percentage terms, this is the work of the organization. The higher the margin, the more efficiently the institution operates, the more profit the organization receives. Development fund calculations are made based on the marginality ratio.

The marginality ratio is used for enterprises that create several types of products. The calculation of the indicator determines the most profitable and unprofitable type of product. Based on calculations, decisions are made to reject unprofitable goods or change technology, increase or decrease the output of goods.

Sales margin calculation

Before introducing a new product to the market, the profitability of sales is calculated. To do this, a calculation is made of the optimal markup on the product that provides the expected profit. The calculation is done for different periods - month, quarter, year. At the initial stage, operational and monthly profitability monitoring is carried out. After production stabilizes, calculations are carried out once a year.

Profit margin

Marginality takes into account the cost of production, excluding the costs associated with doing business. Profit takes into account costs at all stages of doing business. Therefore, profit is less than margin. As margins grow, so do profits. In relation to profit, margin is profit divided by the market value of the product.

Income shows the final result of the organization’s work, margins determine the price. Based on it they do:

• marketing cost calculations
• analyze customer flow
• calculate income level

Commercial activity involves making a profit. Margin is the most striking measure of the success of an enterprise.

Level of medium and large margins

At the start of a new enterprise, part of the funds is allocated for the development of the organization. At this stage of work, the margin is lower than statistical. In some cases, the company operates at a loss. After bringing the enterprise to the planned level, profits increase. The organization ceases to be unprofitable and becomes profitable.

Financiers distinguish between medium, small and large profitability. It is generally accepted that an enterprise is operating normally if the margin is at least 10%. This indicator is considered to be average. If the enterprise indicator is less than 10%, measures are taken to increase the level of profitability.

20 -25% is an indicator of good performance of the organization. This is a big margin. According to statistics, the average profitability of a successful enterprise is 11-20%.

Margin or trading margin

When the margin is calculated in %, beginners confuse it with a markup. Margin is the ratio of the difference between the selling price and the cost to the selling price. Markup is the ratio of the difference between the selling price and the cost to the cost. In monetary terms, these values ​​are the same. In percentage terms they differ.

: a product was bought for 50 rubles, sold for 150. Profit is (150 – 50) / 50 = 2 x 100% = 200%.

Margin calculation: (150 – 50) / 150 = 0.66 x 100% = 66%.

Video about the difference between these two indicators:

Table 1. Differences between margin and markup.

From a market point of view, the amount of the premium is not limited by anything. Some countries have regulations governing the amount of the premium.

Indicator analysis

By studying marginality, they get a complete picture of the organization’s performance. It shows how profitable/unprofitable the enterprise is. Using the indicator, the following is determined and controlled:

• profitability of the work as a whole and of each project separately
• the impact of employee remuneration on the profitability of the enterprise
• the most profitable customers
• increase or decrease in profitability
• most expensive projects
• how much does each service cost?

Profitability analysis allows you to respond in a timely manner to a decrease in profitability and increase the cost of services. If the need arises, unprofitable projects are abandoned.

For an accurate picture, a quarterly figure is calculated. If the enterprise operates stably, annual payments are limited.

For the normal operation of any enterprise, calculation and analysis of margins is necessary at every stage. It allows you to respond in a timely manner to a decrease in profitability, form a development fund, and correctly set a premium for goods (services).

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

Profit per unit = Price - (Direct costs + Share of overhead costs).

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

Thus, profit per unit depends on the selected overhead allocation base. In addition, as output decreases, semi-fixed costs change little, 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 products of another type.

To more accurately assess the profitability of the assortment, indicators of marginal profit per unit of production are introduced:

Contribution Margin = Price - Direct Costs

and marginal profitability per unit of production:

Marginal profitability = Marginal profit / Direct costs.

At the same time, for the company to operate profitably, 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 how much income the company will receive per ruble invested in direct production costs. For a trading company, marginal profitability is similar to the markup on a product.

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

Table 1.

	Product 1	Product 2	Product 3
Issue at wholesale prices
Materials
Materials for technological purposes
Basic salary
Bonuses by type of payment
Additional wages for production workers
Social security contributions
Transportation and procurement costs
Direct costs, total
Marginal profit
Marginal profitability, %
General production expenses
General running costs
Non-production expenses
Full cost

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 volumes of output 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 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 is reached that can be sold on the market.

For a manufacturing company, a normal level of marginal profitability can be considered to be 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 defining the company’s goals, and based on these goals, select the most significant ones for the company in this moment evaluation criteria that will give a holistic view of working with the assortment.

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

Many companies today are implementing the system management accounting. One of its main indicators, which is used to assess business performance, is marginal profit. In this article in simple language and using a conditional example, we will tell you what marginal profit is, why it is needed and how to determine it.

What is contribution margin?

Marginal profit (or contribution margin) is the difference between sales revenue and variable costs. Moreover, both of these indicators - revenue and costs - are taken for a specific volume of production.

We can also say that this is the income that remains with the business from sales minus variable costs.

As can be seen from the figure, marginal profit is less than revenue by the amount of variable costs, but more than profit from sales by the amount of fixed costs.

To correctly calculate marginal profit, you need to understand which company expenses are considered fixed costs and which are variable.

Entrepreneur Vasily Petkin decided to start a business producing entrance and interior doors. For him, variable costs will be, for example, expenses for materials, fittings, components, as well as workers’ salaries.

These costs are directly proportional to the number of doors produced, and the more orders there are, the greater these costs. But the costs of maintaining an office and a retail outlet do not depend on how many doors are sold, 10 or 1000 - these are fixed costs. Vasily will bear such expenses even if he does not have a single order.

Thus, fixed costs do not depend on production volumes, and variable costs change in proportion to the amount of products or services produced.

Marginal profit is the part of the revenue that remains with the company to cover fixed costs and make a profit. Therefore, the contribution margin is often called the “covering contribution.”

Marginal profit and accounting profit are two different things. Firstly, they are calculated using different formulas. Secondly, accounting profit are determined for the enterprise as a whole for a period of time, and the marginal rate is determined only based on the specific volume of products (work, services) produced and sold.

How is contribution margin calculated: formula

The value of the indicator we are studying is expressed in absolute and relative values.

and for one:

In these formulas, revenue and price are taken without VAT and excise taxes. Unit variable costs are variable costs per unit of output.

Vasily Petkin’s enterprise produced and sold 15 doors at a price of 10 USD. (excluding VAT) each. Variable expenses amounted to 6 cu. per door. The calculation of marginal profit will look like this:

Total contribution margin:
15*10 – 15*6 = 60 USD

Marginal profit per unit of production:
10 – 6 = 4 c.u.

Why do you need marginal profit?

First of all, it is needed to calculate the break-even point. This is the volume of production at which the enterprise covers all its expenses, but does not yet make a profit:

At the break-even point, revenue is equal to the sum of variable and fixed costs, and profit is zero.

Vasily Petkin’s fixed expenses in our example are 400 USD. To find out whether it is enough for Vasily to sell 15 doors to reach the break-even level, let’s calculate the break-even point:

Break-even point (in units):
400 / 4 = 100 doors

Break-even point (in monetary terms):
(150 * 400) / 60 = $1,000

Thus, Vasily’s enterprise is beyond the threshold of profitability, and revenue does not yet cover all expenses. To break even, he needs to sell 90 more doors. After this, each subsequent door will generate profit.

Such calculations are especially important to make at the stage of a company entering the market, as well as for planning income and expenses.

When a company has several types of products, it is incorrect to compare the absolute amounts of marginal profit, because prices and sales volumes are different.

In this case, the marginal profit ratio is used. It shows how contribution margin relates to sales volume.

Formula and example of calculating the marginal profit ratio

The formula looks like this:

The coefficient can be calculated either in shares, using the above formula, or as a percentage. To do this, the resulting value is multiplied by 100.

Calculation of the marginal profit ratio for entrepreneur Vasily Petkin:
4 / 10 = 0.4, or 40%

The contribution margin ratio is also called contribution margin or marginal profitability. It allows you to compare marginal income for different products to manage your assortment.

Vasily Petkin produces 2 types of doors - entrance and interior.

Let's carry out marginal analysis using the above formulas:

As can be seen from the table, the largest amount of marginal profit is entrance doors. It can be assumed that it is more profitable for Vasily to produce them than interior ones. But the marginal profit ratio for entrance doors is half that of interior doors - 20% versus 40%. It turns out that, despite lower revenue and marginal income, interior doors are more profitable. They generate greater returns in relation to sales volume than interiors.

How to interpret the contribution margin figure

The efficiency of an enterprise depends on how much marginal profit is able to cover fixed costs:

• “minus” marginal profit means that the company has not yet reached the break-even level and has not even covered its variable costs. If the specific marginal profit is negative, it means that gross errors were made in pricing, because the price is below cost and does not even cover unit variable costs. But a positive marginal income does not mean that the business is profitable, because it may not be enough to cover fixed costs;
• if the enterprise has reached the profitability threshold, then marginal profit is equal to fixed costs;
• When a business is efficient, the marginal income is enough to cover fixed expenses and taxes on income, and what is left is the net profit of the business.

You can clearly trace the relationship between sales volumes, marginal income and profit using the example of interior doors by Vasily Petkin (the same source data):

Door output volume		Fixed costs	Variable costs	General costs	Marginal income	Profit from sales

As can be seen from the table, the marginal income becomes positive after selling 20 doors. But production will not be profitable until it reaches the break-even zone (highlighted in blue). For sales of less than 100 doors, the profit from sales is negative, which means a loss. Vasily's business will bring more profit if he sells 101 or more doors. And profitability will increase with increasing sales volume.

This is the result of the “operating leverage effect”. Its meaning is that any change in sales volume leads to an even greater change in the financial result, which is also evident from the table.

Marginal profit rates and ways to increase it

There is no standard for marginal profit. Its level varies greatly depending on the industry and product category. Unlike luxury goods, goods and services with legal price restrictions will always have low margins.

How you can increase your profit margin:

• Increase revenue. Ideally, one should strive to increase the price category of a product by building trust in the brand, increasing its prestige and quality of service. But it is unrealistic to constantly raise prices, so you can take the path of increasing production volumes. This will reduce overall costs and increase the share of profit in the structure of marginal income.
• Reduce variable costs: look for the most favorable conditions for the purchase of raw materials (discounts from dealers or based on the volume of purchases, import substitution, etc.), as well as attract cheaper labor.
• Review the assortment: increase the share of goods with the highest margins in total sales. In our example, at Vasily Petkin’s enterprise, the high-margin product is interior doors, so in order to increase the total marginal profit, he needs to increase the production of this particular category of product.

Thus, the management-based analysis discussed above can significantly improve business efficiency.

Within comprehensive accounting services 1C-WiseAdvice company provides services for preparing data for management accounting and reporting. Such reporting is tailored to the specifics of your business. If you need to make settings from scratch, we have ready-made report templates. We will help you develop requirements for the implementation of management accounting and introduce you to our best practices.

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Any business implies the ultimate goal of making a profit. The economic meaning of this category may vary depending on what items are included and what costs and additional payments are excluded. The type of profit is also important in relation to the purpose of its allocation. Thus, income as taxable profit is of interest to tax authorities, and distributed profit is of interest to shareholders. The businessman himself will primarily be concerned with net profit.

However, when planning the possibility of investment, assessing the efficiency of business, 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 financial efficiency business.

Let's look at the essence of marginal profit and 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 increasing this type of profit.

Marginal profit: what is it?

The profit of an 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”) is the income of an enterprise generated by the proceeds from the sale of a certain volume of goods minus the costs generated 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 costs of labor remuneration for personnel are covered, and the remainder is the businessman’s net profit.

A close, but not identical term is . The difference with marginal profit is that non-production costs are also taken into account, and it is also calculated per unit of production. Marginal profit takes into account the entire range of manufactured goods, thereby characterizing the overall profitability of the enterprise.

The word “margin” is sometimes used in professional slang to refer to the marginal profit itself, but more often it refers to the marginal profitability indicator (it is calculated as a percentage).

FOR YOUR INFORMATION! An increase in marginal profit means an increase in the enterprise's net profit due to faster reimbursement 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 = V r – R per.

• В р – the amount of revenue from sold goods, services, works;
• R per. – variable expenses.

When calculating marginal profit, it is important to remember some accounting features:

1. Revenue for this formula is taken excluding VAT and excise taxes.
2. Variable expenses are those expenses 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 assortment, technological modernization and other factors. The decisive factors are solely the volume of production and/or sales.

Calculating margin - an indicator of marginal income - is convenient for comparison with other financial categories, data on various types products or numbers shown by other enterprises. The margin is calculated as follows:

M = P margin. / V x 100

• M – margin;
• P margin – marginal profit;
• In p – the amount of revenue from sold goods, services, works.

This indicator highlights the percentage share of marginal profit in sales revenue.

How to interpret the contribution margin figure

Marginal profit is needed to determine the company's break-even strategy. You can do it for each type of product from the assortment and for the entire production.

Breakeven- a state of production (volume of output) in which the amount of revenue and costs (variables plus constants) balance each other. This volume can be calculated as follows:

V without. = Р c o nst / (C unit – Р per.)

• V without. – volume of goods ensuring break-even production;
• R c o nst – fixed costs (total amount);
• C units – selling price of a unit of manufactured products;
• R per. – the cost of 1 unit of goods sold (variable costs per unit of production).

In other words, the break-even volume depends on what proportion of the “coverage amount,” that is, the marginal profit, will cover the fixed costs of each unit of production.

In addition to break-even analysis, the margin indicator is used for:

• developing a management strategy for making decisions regarding the assortment;
• forecasting the activities of both your company and competitors;
• planning pricing policy.

Marginal profit rates

Obviously, there can be no generally accepted standard margin values. This indicator strongly depends on the industry of production. Therefore, it makes sense to consider regulations 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 higher margins than everyday goods.

Ways to influence the growth of marginal profit

1. Intensive way increasing marginal profit - taking into account the marginality category within one industry.

Low-margin goods receive a limited trading margin when sold. But you can influence the ratio of marketing 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 pharmaceuticals, dietary supplements and cosmetics have higher margins than commonly used ones medicines. Pharmaceutical companies do not have the right to raise the markup above the level established by the state. But they can advertise dietary supplements more, stimulate employees who ensure a high level of sales, negotiate with doctors who will recommend them to their patients, and use other marketing moves. This way you can influence the ratio of sales of high- and low-margin groups of goods.

2. Extensive way influence on margin growth - an increase in the price of a product, as a result of which the marginal percentage of revenue will increase. Sometimes, in order to maintain or even increase sales volume, companies may offer additional services or other bonuses along with the product.

ATTENTION! In business practice, it makes sense to wisely combine both of these methods of increasing marginal profit.

Limitations of Contribution Margin Analysis

The method of analysis and forecast, which is based on the marginal profit indicator, cannot be 100% effective. It is subject to some restrictions due to the economic meaning of the concept of margin. So, when analyzing the profitability and profitability of an enterprise using margin calculations, you need to take into account the following nuances:

1. Even with constant production costs, the market price of a product can change sharply for various reasons, and even an increase in output volume will not affect the real indicator, unlike the calculated one.
2. Fixed and variable costs may change places from time to time, which will distort the calculated margin figure.
3. Other variable factors are not taken into account, in addition to the volume of output, which can also affect sales, and therefore marginal profit: such as technological characteristics, changes in wages, personnel productivity, etc.
4. The margin calculation method assumes that all manufactured products were sold, and this is not always the case.