Marginal profit(from English:marginal revenue) is the difference between income from sales or sales of products and various variable costs. In this case, income is considered as the company's sales revenue excluding VAT. As for variable costs, everything is quite simple here; from the final cost of the product, the enterprise calculates: the cost of electricity costs, wages of working personnel, the cost of raw materials, fuel, various unforeseen financial investments, etc.

Undoubtedly, margin is the main indicator of the capacity potential of an enterprise. The higher it is, the more financial resources are available to pay off variable costs, which increases the potential for the production plan.

It is quite profitable to produce large quantities of goods, since with large-scale production the cost of goods is reduced, which allows you to have a large marginal profit. This pattern in economics is called “economy of scale.” We'll talk about it later.

In business and retail, this concept is quite widespread. This is due to the fact that retailers can change the price of goods during market instability. Because in the laws Russian Federation There is no mention of a penalty for exceeding the margin rate. Permissiveness is restrained only by competition. When there is a shortage of goods, the margin tends to increase. This is a natural response of supply to demand.

Margin in retail- the main income of businessmen. They form the final cost of products on the market.

Calculation formula for calculating the margin rate

Gross marginal profit includes two fundamental indicators - revenue from sales of goods and variable costs.

As you know, margin is the difference between income and variable costs. Below you can consider the formula by which you can calculate the marginal profit.

Marginal profit = “price” minus “variable costs”.

The formula can be seen below.

Marginal profit per unit:

“Price” minus “Cost”.

For example: the price per liter is 50 rubles, and the cost is 20 rubles.

Calculation: 50-20=30,

30 rubles - marginal profit per unit of goods.

To find the total marginal profit, subtract variable costs from this cost (30 rubles).

If your income only covers the final expenses of the manufacturer, then it is at the “point of hopelessness”.

Marginal profit analysis is needed to calculate the critical volume of output that can cover variable costs 100%. It is quite common to call this the break-even point. It provides a guarantee for the feasibility and profitability of production.

The demand for products and the costs of their production are the main criteria for marginal analysis. When calculating it, all factors are taken into account, the influence of which may primarily affect the price. After all, price is the overwhelming criterion for selecting manufactured products on the market. It is a guideline for the buyer; the demand for the product and the success of sales depend on it.

Analyzing the technological capabilities of the enterprise, its tariffs for the payment of wages, constant and not fixed costs, taxes and various deductions, it will be possible to formulate the profitability of product production and set the minimum amount of output at which the manufacturer will make a profit.

If the marginal profit is equal to the cost of production, then the profit is zero.

Over the past 15 years, a list of products that have a biased margin percentage has been formed.

1. Beverages. All retailers know that reselling drinks is a very profitable business. Another plus is that this product is in seasonal demand.
2. Bijouterie. Products made from cheap plastics, glass and various metals are sold with a 300% markup. It's hard to argue that this is beneficial.
3. Flowers. The cost of one flower is often 7% of the total cost. Do the math yourself.
4. Hand-made products. There's a lot of people here. Prices for exclusive goods can differ in price by thousands, or even more times.
5. Tea and coffee by weight. It is quite difficult to imagine that you can make a lot of money from this. But now, for example, by purchasing tea or coffee in China at a wholesale price and selling it in your store at a 300% markup, you can achieve up to 70-80% margin.
6. Cosmetics. This information will be useful for women. General statistics say that only 25% of the total price of cosmetics is its cost, and 75% is various markups from retailers.
7. Sweets for children. Opening a point of sale for this product provides payback in just the first month. Because the price of the same popcorn, which at cost is equal to 5% of the total price, is inflated by at least 3-4 times, allowing you to get up to 90% of the margin.

Every businessman is interested in creating a business with maximum foreign exchange returns. Of course, no one wants to get involved in a business that will not generate profitable income. Also, no one wants to go into the red. For this purpose, products or offers are classified into:

1. High margin;
2. Average margin;
3. Low margin;

What is a high-margin product? There are a number of reasons why this product is overpriced:

• It has high demand on the market, but is sold in small quantities. This includes such types of goods as: jewelry, products made of precious metals, branded products for which demand is high throughout the year;
• Created a “wow” effect in the market. These can be different things: from socks to various gadgets. The margin on them increases sharply during periods of surge in demand. But, as a rule, these products hold a high standard only for a short time;
• Seasonal goods. Most people have heard at least once that winter clothes should be bought in the summer. This recommendation proves that the markup on a product increases sharply as its demand increases. Seasonal goods have an order of magnitude higher price than in the off-season. Take ice cream, for example. In winter, the price for this product is the lowest, since it does not cause a stir and the margin on it is about 15% of the real cost. Another situation is in summer period when the demand for a product increases hundreds of times. During this period, entrepreneurs increase their margin to 50-70%, and in some cases by more than 100-200%. For example, at resorts.

There are also high-margin service sectors: cafes, restaurants, etc. Institutions of this type have a high margin percentage (100-200%). In a restaurant, for example, you can sell one bottle of wine, which costs about 1,000 rubles, for 3,000 rubles. The price, as a rule, depends on the status of the establishment and the quality of services. But strangely enough, the demand for these services is growing over time.

Medium-margin goods. These products are often not for everyday use. The margin on them is less than on high-margin ones. Such products include: household appliances, Construction Materials, various instruments, electronics and even cars.

Sales representatives typically set a margin of 30-40%. The presented products also have some seasonality, but it is not so great as to be considered.

In business this niche brings good income, since the balance between price and supply increases the number of sales.

Low-margin goods. As a rule, these are goods of everyday use, such as: household chemicals, non-food products, children's products, etc.

The margin on these goods cannot be higher than 10-20 percent. The benefit from sales of this group of products is due to high turnover.

As for the service sector, according to research data, the lowest income belongs to transportation- no more than 20%.

To date, the state has not yet established the maximum allowable margin for goods and services. That's why price policy is stable only due to market competition. And exceeding the price limit entails the loss of the most important component market trade- client.

It is most profitable to buy medium-margin and low-margin goods from wholesalers or close to production, if you have such an opportunity. The higher the wholesale purchase, the greater the discount the manufacturer or distributor gives. As a result, the amount saved partially or fully compensates for transportation or other costs, which reduces its cost.

In harsh conditions market economy the formation of the price of a manufactured product is influenced by many external and internal factors. Government policy is not always aimed at improving pricing in the common market. Increasing tariffs and taxes entails a very large increase in the price of products. Therefore, production facilities are trying to put only some types of goods into large-scale production. This allows you to compensate for all fixed and variable costs and receive a large marginal profit. This is called “economy of scale”.

But the situation is worse with those goods that, although they have demand in the consumer market, are not very high. It is not profitable to place such goods on a large production flow, since wholesale purchases are very small. Manufacturing can only be rational if its cost is high, since all taxation costs and production costs will be taken into account. Such a product is considered high-margin.

There are criteria by which a product is considered profitable for large-scale production:

• Great consumer demand;
• Profitability of implementation;
• Cyclical use of this product among customers;
• Technological accessibility;
• Consumer accessibility;
• Availability of multiple points of sale;
• Stability of implementation.

Compliance with the conditions guarantees that the product will be sold stably on the market, because it is stability that makes it clear that the product can be put into production by default. The demand for it will not fall for a long time and with this you can make long-term plans for business diversification.

An important factor in rising product prices is variable costs. After all, they make up 40% of the cost of production. Reducing payments on them will reduce the final cost of the product and increase the margin.

Variable cost reduction methods:

• Implementation innovative technologies;
• Simplification technological process;
• Automation of production;
• Reducing the cost of raw materials and types of purchased fuel;
• Change in product range.

Concerning positive side margin, it, like any other economic value, is beneficial only for sales representatives. Since the state has not approved the maximum permissible margin interest rate. A good opportunity for those who want to create a high-margin product or service.

The other side is consumer, since the buyer always has to overpay for the product. And it is unlikely that he will ever be able to find out the real cost of the goods. This could become a kind of consumer revolt, which will provoke a decrease in the interest rate of the margin. This benefits no one.

Increasingly, consumers are receiving requests to the Ministry of Finance to distribute the maximum allowable margin for each type of product and service. A reform of this kind will make it possible to stabilize prices, expand the number of points of sale of goods, and significantly reduce the price of high-margin products.

In what cases can the state influence margins?

The state apparatus in Russia does not interfere in the market economy as long as the business is not a monopoly. If the enterprise has grown to such a scale that there are no competitors left in terms of market shares or production volume, the antimonopoly committee comes into play. This government structure was created in order to restrain the ardor of a monopolist in a market where there is no competition for him.

If a monopoly begins to raise prices without good reason, the antimonopoly committee may appeal to the Supreme Court. Responsibility for non-compliance with the rules may be as follows:

1. A fine, the amount of which is not limited. For example, in 2016, the court ordered Google to pay a fine of 500 million rubles for deliberately creating unfavorable conditions for other players in the monopolized mobile software market;
2. Restriction on activities in the Russian Federation;
3. Prohibition on price increases.

If a monopolized market belongs to one or two companies, the marginality of products and services on it is weakly related to the laws of a market economy. Consumers have no other choice but to use the goods or services offered by the monopolist. An example is the above-mentioned mobile market software, 80% of which is occupied by Google with its operating system “Android”.

Competing with a monopolist is often pointless. A new player who wants to win market share must have almost unlimited cash injections, which will be aimed at reducing the cost of products or services for the end consumer. This must be done so that the new supply can compete with the monopoly on price. Obviously, in such situations, the new player has to work at a loss for years. Sometimes decades. Until the market share will provide exponential growth. Resources required for this great amount, so it is difficult to compete with monopolies. The only way to exist in the same market with large corporations- activities of the antimonopoly service or transition to other niches, meeting the needs of the audience in new ways or targeting a different target audience.

Increasing marginal income is one of the main priorities of any developing enterprise. is a basic indicator financial activities. this indicator is the difference between total revenue from the sale of goods and variable costs.

Variable costs are costs that are directly proportional to the volume of products produced. Therefore, if production ceases, variable costs also disappear. These include the purchase of raw materials for the production of goods and wage workers (if it is not fixed and depends on the volume of products produced).

You can also calculate the average marginal income of the enterprise. To do this, the average variable cost is subtracted from the product price. Average marginal profit determines the share of replacement of a specific unit of production of fixed costs.

What determines the amount of marginal income?

There are a huge number of different factors that influence the increase in marginal profit. Among them are internal (competent management, level of technological process) and external (level of economic well-being of consumers, market situation). This means that even proper management of an enterprise in itself is not a guarantee of its economic prosperity.

Despite the factors that are beyond the control of the entrepreneur, there are no less ways to increase marginal income. The margin itself is determined by two indicators - the cost of selling the product and the amount of variable costs.

Marginal profit can be maximized by the following methods:

• by reducing the price.
• Reducing costs by increasing sales volumes.
• Change the volume of production, accordingly adjusting the amount of fixed and variable costs.

Despite its apparent simplicity, solving this problem is not an easy task. Considering a large number of factors, it is very difficult to find the optimal method to maximize enterprise efficiency.

Economics knows three levers of influence that can influence an increase in marginal income. In order to find a rational solution, you should use them all: these are management personnel, products and work with customers (clients).

Marginal profit is directly dependent on the performance of sales managers. Analysis of the results of their work makes it easy to identify strong and weak players in the team. A rational conclusion from the current picture would be a decision to redistribute forces. Most effective employees difficult areas should be secured to increase sales. Weak employees should be sent to advanced training courses or fired.

During the analysis process, it is necessary to take into account that the working conditions of employees may differ significantly. Work experience, of course, also plays an important role, but the distribution of clientele, first of all, will influence the performance of any manager. Obviously, a salesperson who works with VIP clients has a significant chance of success compared to a colleague who is less fortunate.

On practice

For an enterprise producing different types products, it is important to distribute the entire range of products in accordance with the marginal profit ratio of each. The profit ratio is defined as the ratio of the specific marginal profit per unit specific product to the proceeds from the sale of a unit of the same product.

In other words, it is one of the most important tools in the arsenal of any entrepreneur, as it determines the percentage of the total revenue that the businessman will receive as margin. Therefore, the higher the coefficient, the more profitable for the enterprise sell this product.

The higher the marginal profit ratio, the more profitable it is for the company to sell this product.

However, before deciding on which product to bet on, it is useful to compare the product with its market rating. Not every product with a high contribution margin is profitable, as it may not meet competitive standards. Two the most important characteristics products sold - and the marginal index - are decisive when deciding which type of product is most profitable for sales.

A number of conclusions can be drawn from this:

• Uncompetitive products with a low marginal profit ratio are excluded from production.
• Competitive products with a high coefficient need to be promoted, as well as their production volume increased.
• It makes sense to find out and eliminate the reasons for the low marginal coefficient of other competitive products.
• It is relevant to analyze products with average indicators in order to develop ways to increase them.

Working with clients

It is equally important to develop a strategy for working with clients. The sum of the aggregates of various indicators may be decisive for choosing the most beneficial nature of further working relationships:

• When working with a client in unfavorable conditions for the company, you should look for ways to maximize marginal profitability or terminate the relationship with this person.
• Customers whose deliveries are characterized by high marginal profitability, but are characterized by low volumes, should be encouraged to purchase large quantities of finished products.
• The circle of clients characterized by a large volume of purchases requires increased attention.

It is necessary to increase the number of customers with large volumes of orders and retain existing ones. An increase in marginal income not only ensures an increase in the company’s overall gross profit, but also systematizes the entire course of the enterprise’s work in the most rational way. This allows not only to significantly reduce fixed costs, but also to maximize the efficiency of the entire production as a whole.

Marginal profit (in other words, “margin”, contribution margin) is one of the main indicators for assessing the success of an enterprise. It is important not only to know the formula for calculating it, but also to understand what it is used for.

Determination of marginal profit

To begin with, we note that margin is financial indicator. It reflects the maximum received from a particular type of product or service of an enterprise. Shows how profitable the production and/or sale of these goods or services is. Using this indicator, you can assess whether the company can cover its fixed costs.

Any profit is the difference between income (or revenue) and some costs (costs). The only question is what costs we need to take into account in this indicator.

Marginal profit/loss is revenue minus variable costs/expenses (in this article we will assume that these are the same thing). If revenue is greater than variable costs, then we will make a profit, otherwise it is a loss.

You can find out what revenue is.

Formula for calculating marginal profit

As follows from the formula, the calculation of marginal profit uses revenue data and the entire amount of variable costs.

Formula for calculating revenue

Since we calculate revenue based on a certain number of units of goods (that is, from a certain sales volume), then the value of marginal profit will be calculated from the same sales volume.

Let us now determine what should be classified as variable costs.

Determination of variable costs

Variable costs- These are costs that depend on the volume of goods produced. Unlike constants, which the enterprise bears in any case variable costs appear only during production. Thus, if such production is stopped, the variable costs for this product disappear.

An example of fixed costs in the production of plastic containers is the rental fee for premises necessary for the operation of the enterprise, which does not depend on the volume of production. Examples of variables are the raw materials and materials needed to produce products, as well as the wages of employees, if it depends on the volume of this output.

As we can see, the contribution margin is calculated for a certain volume of production. At the same time, for the calculation it is necessary to know the price at which we sell the product and all the variable costs incurred to produce this volume.

This means that contribution margin is the difference between revenue and variable costs incurred.

Specific marginal profit

Sometimes it makes sense to use unit indicators to compare the profitability of several products. Specific marginal profit– this is the contribution margin from one unit of production, that is, the margin from a volume equal to one unit of goods.

Marginal profit ratio

All calculated values ​​are absolute, that is, expressed in conventional monetary units (for example, in rubles). In cases where an enterprise produces more than one type of product, it may be more rational to use contribution margin ratio, which expresses the ratio of margin to revenue and is relative.

Calculation examples

Let's give an example of calculating marginal profit.

Let's assume that a plastic packaging plant produces three types: per 1 liter, per 5 liters and per 10. It is necessary to calculate the marginal profit and coefficient, knowing the sales income and variable costs for 1 unit of each type.

Let us recall that marginal profit is calculated as the difference between revenue and variable costs, that is, for the first product it is 15 rubles. minus 7 rubles, for the second - 25 rubles. minus 15 rub. and 40 rub. minus 27 rub. - for the third. Dividing the obtained data by revenue, we get the margin ratio.

As we can see, the third type of product gives the highest margin. However, in relation to the revenue received per unit of goods, this product provides only 33%, in contrast to the first type, which provides 53%. This means that by selling both types of goods for the same amount of revenue, we will receive more profit from the first type.

In this example, we calculated the specific margin because we took data for 1 unit of production.

Let us now consider the margin for one type of product, but for different volumes. At the same time, let’s assume that with an increase in production volume to certain values, variable costs per unit of production decrease (for example, a supplier of raw materials makes a discount when ordering a larger volume).

In this case, marginal profit is defined as revenue from the entire volume minus total variable costs from the same volume.

As can be seen from the table, as volume increases, profit also increases, but the relationship is not linear, since variable costs decrease as volume increases.

Another example.

Suppose our equipment allows us to produce one of two types of products per month (in our case, 1 liter and 5 liters). At the same time, for 1L containers the maximum production volume is 1500 pcs., and for 5L containers - 1000 pcs. Let's calculate what is more profitable for us to produce, taking into account the different costs required for the first and second types, and the different revenues they provide.

As is clear from the example, even taking into account the higher revenue from the second type of product, it is more profitable to produce the first, since the final margin is higher. This was previously shown by the contribution margin coefficient, which we calculated in the first example. Knowing it, you can determine in advance which products are more profitable to produce at known volumes. In other words, the contribution margin ratio represents the percentage of revenue that we will receive as margin.

Break even

When starting a new production from scratch, it is important for us to understand when the enterprise will be able to provide sufficient profitability to cover all costs. To do this, we introduce the concept break even- this is the volume of output for which the margin is equal to fixed costs.

Let's calculate the marginal profit and break-even point using the example of the same plastic container production plant.

For example, monthly fixed costs in production are 10,000 rubles. Let's calculate the break-even point for the production of 1 liter containers.

To solve, we subtract variable costs from the selling price (we get the specific contribution margin) and divide the amount of fixed costs by the resulting value, that is:

Thus, by producing 1250 units monthly, the enterprise will cover all its costs, but at the same time operate without profit.

Let's consider the contribution margin values ​​for different volumes.

Let's display the data from the table in graphical form.

As can be seen from the graph, with a volume of 1250 units, net profit is zero, and our contribution margin is equal to fixed costs. Thus, we found the break-even point in our example.

The difference between gross profit and marginal profit

Let's consider another principle of dividing costs - into direct and indirect. Direct costs are all costs that can be attributed directly to the product/service. While indirect are those costs not related to the product/service that the enterprise incurs in the process of work.

For example, direct costs will include raw materials used for production, wages for workers involved in creating products, and other costs associated with the production and sale of goods. Indirect ones include administration salaries, equipment depreciation (methods for calculating depreciation are described), commissions and interest for the use of bank loans, etc.

Then the difference between revenue and direct costs is (or gross profit, “shaft”). At the same time, many people confuse the shaft with the margin, since the difference between direct and variable costs is not always transparent and obvious.

In other words, gross profit differs from marginal profit in that to calculate it, the sum of direct costs is subtracted from revenue, while for marginal profit, the sum of variables is subtracted from revenue. Since direct costs are not always variable (for example, if there is an employee on the staff whose salary does not depend on the volume of output, that is, the costs of this employee are direct, but not variable), then gross profit is not always equal to marginal profit.

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If the enterprise is not engaged in production, but, for example, only resells the purchased goods, then in this case both direct and variable costs will, in fact, constitute the cost of the resold products. In such a situation, the gross and contribution margin will be equal.

It is worth mentioning that the gross profit indicator is more often used in Western companies. In IFRS, for example, there is neither gross nor marginal profit.

To increase the margin, which essentially depends on two indicators (price and variable costs), it is necessary to change at least one of them, or better yet, both. That is:

• raise the price of a product/service;
• reduce variable costs by reducing the cost of producing 1 unit of goods.

To reduce variable costs the best option may include expenses for conducting transactions with counterparties, as well as with tax and other government agencies. For example, transferring all interactions to electronic format significantly saves staff time and increases their efficiency; transportation costs for meetings and business trips are also reduced.

What is margin in economics?

How is contribution margin calculated?

MP = PE – Zper MP– marginal profit, and Emergency– the company’s net profit, Zper

Marginal profit is the difference between revenue from sales of products manufactured by the enterprise (VAT and excise taxes are not taken into account) and variable production costs. Marginal profit is sometimes called the coverage amount - that is, the part of the revenue remaining to generate profit and cover fixed costs. The higher the marginal profit, the faster the recovery of fixed costs, and the higher the profit that the company ultimately receives.

As for terms, in Russia an analogue of marginal profit can, with some stretch, be called gross profit. Marginal profit can be calculated per unit of manufactured and sold products (specific marginal profit, marginal income). The meaning of this calculation is to obtain information about the increase in profit due to the release of each additional unit of goods. The total amount of marginal profits for the entire range of products is called the marginal profit of the enterprise. The formula for calculating marginal profit is as follows: TRm = TR - TVC, where TRm is marginal profit, TR is total income, TVC is variable costs In a situation where sales volume covers all costs of the enterprise without providing profit (break-even point), marginal profit will be equal to fixed costs.

Marginal profit

If the revenue from product sales exceeds all variable costs, we can talk about the amount of marginal profit. If an enterprise produces a wide range of products, then analysis of this assortment by marginal profit (marginal analysis) helps to determine the most profitable types of products from the point of view of possible profitability, and, accordingly, to identify types of products that are not profitable for the enterprise to produce (or even unprofitable). Marginal profit depends on indicators that are subject to changes in market conditions, such as price and variable costs. In practice, to increase marginal profit, you need to either increase the markup on goods, or sell more goods, ideally, do both at the same time.

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Not only an experienced business manager, but even a novice businessman should know what marginal profit is and what commercial margin is. We invite you to learn everything about this type of profit and what marginal profit shows.

What is margin in economics?

It is generally accepted that the profit margin is the difference obtained after deducting the cost of goods from sales prices, as well as interest rates from quotes established on exchanges. This term can often be found in stock trading and in the work of banks, in the fields of insurance and trade. Each specific direction has certain nuances. In this case, the margin is indicated as a percentage or in values.

What is contribution margin?

Every entrepreneur should be aware that marginal profit is the difference between sales revenue and variable costs. To break even, this type of profit must cover regular costs. In this case, it is customary to measure per unit of production and for an entire direction or division. Marginal profit is the increase in material assets from the sale of a particular product. This type profit equals regular costs.

Why is contribution margin needed?

Not every businessman knows? what is margin needed for and what the level of marginal profit can be. This profit It is generally considered to be the main factor in pricing and profitability of advertising costs. It can reflect the profitability of sales as comprehensively as possible and be the difference between price and cost. It is often expressed as profit or as a percentage of the underlying price. There is an indicator that indicates the difference between revenue from sales of products and the company’s variable expenses. It is commonly called gross margin.

Difference between profit and contribution margin?

Often, beginning businessmen are interested in how the concept of marginal profit differs from profit. Among the main differences are:

1. Profit is the income of the enterprise, the difference between the profit from the sale of products of its own activities and the costs until the moment of sales.
2. Margin and profit are proportional. The higher the company's margin, the more income can be expected. Therefore, we can say that the main difference between marginal profit and profit is where this concept is applied

What is the difference between gross profit and marginal profit?

Even a novice businessman should understand the difference between marginal and gross profit:

1. To calculate gross profit, the sum of direct costs is calculated from revenue, and for marginal profit, the sum of variables is calculated from revenue.
2. Gross profit does not always equal marginal profit, since costs are not always variable.
3. Gross profit reflects the overall success of the company, and marginal income allows you to choose a profitable way of doing business and decide on the type and volume of goods that are produced.

How to calculate contribution margin?

Calculating marginal profit is not that difficult. If a company produces several products at the same time, then marginal profit and its calculation are a significant part of the analysis. The more products a firm produces, the lower its costs.

What is contribution margin

This can also work the other way around as this may involve costing.

You can find out about marginal profit using a special formula. Marginal Profit Formula MP = PE – Zper indicates what amount covers production costs. Here MP– marginal profit, and Emergency– the company’s net profit, Zper– costs are variable. When the income only covers the costs of the enterprise, then it is at the break-even point.

Cost-volume-profit analysis (CVP analysis)

When planning production activities analysis based on the study of the cost-volume-profit relationship is often used. Cost-volume-profit analysis - this is an analysis of cost behavior, which is based on the relationship between costs, revenue (income), production volume and profit; it is a tool for management planning and control. These relationships form the basic model of financial activity, which allows the manager to use it for short-term planning and evaluation of alternative decisions. For example, if the volume of production is determined based on a portfolio of orders, then, using this analysis, it is possible to calculate the amount of costs and the selling price so that the company can receive a certain amount of profit.

The cost-volume-profit relationship can be expressed graphically or using formulas.

In Fig. Figure 2 shows the basic cost-volume-profit model. The graph shows the relationship between revenue (income), costs, production volume, profit or loss. This model is based on a number of fixed relationships. If unit price, costs, efficiency, or other conditions change, the model must be revised.

Rice. 2. The relationship “costs - profit - production volume”

Analysis of the relationship “cost - volume - profit” allows you to determine the volume of production that is necessary to cover all costs, both variable and fixed. As shown in Fig. 2, critical point, this is the one in which the total revenue is equal to the total costs. Thus, critical point - this is the volume of production, sales from which the company begins to earn profit. The critical point is also called the break-even point, equilibrium point, zero profit point, profitability threshold, equilibrium point. Purpose of Critical Point Analysis consists of finding the level of activity (production volume) when sales revenue becomes equal to the sum of all variable and fixed costs, while the company's profit is zero. To calculate the break-even point, the following methods are used:

Mathematical method (equation method);

Marginal profit (income) method;

Graphic method.

Mathematical method based on a formula for calculating enterprise profit. In this case, the relationship “cost - volume - profit” can be expressed by the following formula:

In this case, the profit is zero:

Another way to determine the critical point is using marginal profit concept . Marginal profit is the excess of sales revenue over all variable costs associated with a given sales volume. In other words, contribution margin is the difference between sales revenue and variable costs:

IN economic literature this indicator is often called coverage amount .

Marginal profit - what is it for and what do its indicators say?

Those. on the other hand, marginal profit must cover the enterprise’s fixed costs and provide it with profit from the sale of products, works, and services.

If we subtract fixed costs from marginal profit, we get the value operating profit(revenue from sales):

As a result, the critical point equation for the marginal approach in terms of units of production will be as follows:

Next, we determine the critical point using graphic method using three options. In Fig. 3 shows a graph of the critical point for mathematical method . This graph consists of two straight lines - a straight line describing the behavior of total costs (U2 = A + bX) , and direct, reflecting the behavior of revenue from the sale of products (works, services, goods) (U1 = Price of 1 unit × Production volume) , depending on changes in sales volumes.

In addition, the diagram shows a line of fixed costs (U3 = A) , which runs parallel to the x-axis at the point with the coordinates of fixed costs. In this case, variable costs will be equal to the distance between the lines of total costs and fixed costs.

Rice. 3. The relationship “cost - volume - profit” with the mathematical method

The abscissa axis shows sales volume in natural units of measurement, and the ordinate axis shows costs and income in monetary terms. The critical point on the graph lies at the intersection of the line of total costs and the line of total income (revenue) from sales; at this point, revenue is equal to costs, i.e. the point of intersection will indicate a state of equilibrium.

The interval to the critical point represents the loss area, and the profit area is shown in the figure starting from the critical point. The critical point shows how far revenue can fall before there is a loss. The amount of profit received by an enterprise is determined by the difference between revenue from the sale of products and total costs.

In Fig. 4 shows a graph for the method marginal profit.

To graphically determine the value of marginal profit, in addition to the lines of revenue and total costs, a line is drawn (U4 = bX) , characterizing the behavior of variable costs when the business activity of an enterprise changes. This line will pass through the origin, parallel to the total cost line (U2 = bX + A) .

In this method, the critical point can be defined as the point at which the difference between contribution margin and fixed costs is zero, or the point at which contribution margin equals fixed costs.

The option of constructing a graph with this method is considered more preferable, since it allows you to immediately highlight the marginal profit at any point, as the distance between the sales revenue line and the total variable cost line.

In any case, in each of the considered graphs financial results(profits and losses) at different sales levels are determined only by calculation, as the distance between the lines of revenue and gross costs.

Rice. 4. The relationship “cost - volume - profit” with marginal profit

Graphs for determining the break-even point by plotting total costs can be converted into “Profit - Volume” graphs. The third version of the graphical method is considered the most visual (Fig. 5).

Rice. 5. Relationship “Profit - Volume”

In this graph, the x-axis represents the different levels of sales volume, and profits and losses are marked on the y-axis. Profit (or loss) is plotted for each sell level. These points are connected by a profit line. The zero profit point is located where the profit line intersects the x-axis. If the sales volume is zero, then the maximum losses will correspond to the amount of fixed costs. As sales volumes increase, contribution margin reduces losses. Each unit sold will generate a contribution margin per unit or cover rate , which is defined as the difference between the unit selling price and unit variable costs. The break-even point is reached when the total marginal profit is equal to the amount of fixed costs. The sale of each subsequent unit of production will bring profit to the company.

The “Profit - Volume” chart makes it possible to predict market capacity and break-even volume at different levels prices, if extreme values ​​of prices and demand are specified. Using this graph, you can also create a sequential graph to estimate the amount of marginal profit from the activities of different divisions or product groups.

As the critical volume increases, the enterprise's profit decreases. The main factors influencing the value of the critical production volume are:

An increase in fixed costs, leading to an increase in the critical volume of production; accordingly, with a decrease in fixed costs, the critical volume of production decreases;

An increase in variable costs per unit of production at a constant price, leading to an increase in the critical volume of production; accordingly, with a decrease in variable costs per unit of production, the critical volume of production decreases;

An increase in the selling price with constant variable costs per unit of production, leading to a decrease in the critical production volume.

Obviously, the critical production volume decreases if the growth rate of fixed costs is less than the growth rate of marginal income per unit of output.

What is the formula for calculating marginal profit?

Marginal profit

Definition

Marginal profit ( English Contribution Margin) is one of the concepts management accounting and is used in cost-volume-profit analysis to determine the profitability of a particular type of product or service. This indicator can be calculated per 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 an additional batch of products should be sold at a lower price.
2. To assess profitability at different levels of business activity.
3. To select the types of products with the greatest 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 profit margin.

Formula

Marginal profit per unit of production

The value of this indicator per unit of production is calculated using the following formula.

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

Total contribution margin

Represents the difference between revenue and total variable costs.

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

Marginal profit 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 coefficient of 0.2 corresponds to 20%.

Schedule

The relationship between the amount of total marginal profit and the volume of product sales is presented in the graph below.

Since revenue from product sales and the amount of total variable costs change in direct proportion to the level of business activity, the amount of total marginal profit increases in proportion to the growth in sales volume.

In contrast, unit contribution margin remains the same at any level of business activity, provided that unit price and unit variable costs remain constant. The behavior of this indicator is demonstrated in the graph below.

It should be noted that the amount of marginal profit in some circumstances can take negative values. This means that revenue from sales of products does not even cover the variable costs incurred. If these circumstances continue, the company's management needs to consider a decision to stop the production and sale of these types of products.

Calculation example

LLC "Retail Fashion LTD" retail store clothes, which sells four types of goods. Data regarding sales price, variable costs and sales volume in the reporting quarter are presented in the table.

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

CM per Unit Jeans = 85 – 50 = 35 USD

CM per Unit Pants = 50 – 25 = 25 USD

CM per Unit Raglan = 45 – 30 = 15 USD

CM per Unit Sweaters = 90 – 60 = 30 USD

S Jeans = 85 × 2,500 = 212,500 USD

S Pants = 50 × 1,700 = 85,000 USD

S Raglan = 45 × 3,250 = 146,250 USD

S Sweaters = 90 × 1,300 = 117,000 USD

TVC Jeans = 50 × 2,500 = 125,000 USD

TVC Pants = 25 × 1,700 = 42,500 USD

TVC Raglan = 30 × 3,250 = 97,500 USD

TVC of Sweaters = 60 × 1,300 = 78,000 USD

TCM Jeans = 212,500 – 125,000 = 87,500 USD

TCM Pants = 85,000 – 42,500 = 42,500 USD

TCM Raglan = 146,250 – 97,500 = 48,750 USD

TCM Sweaters = 117,000 – 78,000 = 39,000 USD

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%

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

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

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

Marginal profit rate

The critical volume is often found using the concept of marginal profit rate, i.e. contribution margin share in revenue, usually measured as a percentage

At the critical point P = 0, Mk = Z1

Threshold revenue is equal to the ratio of fixed costs to the marginal profit rate.

km is also called the marginality coefficient or the marginality of the product, the revenue coefficient. In the example, the marginal profit rate is:

or 44.44%.

Graphic method.

In the coordinate axes "V" (production volume (sales) and "B", "Z", "P" (revenue, costs, profit) according to the known equations of revenue (B = B' × V) and costs (Z = Z1 + 3'2V) draw lines of revenue and total costs.

Rice. 35. Graph of the dependence of revenue, costs and profit on sales (production) volume

The critical point lies at the intersection of the line of total costs and the line of total income (revenue) from sales; at this point, revenue is equal to costs, Vk = Zk, profit is zero. If the sales volume is greater than the critical one, the company has a profit, and if it is less, a loss: if V > Vк profit; if V< Vк убыток.

The break-even chart is clearer if you highlight the marginal profit area when constructing it.

Rice. 36. Marginal profit area

As can be seen from the graph, at the critical point Mk = Z1; because Mk = M’Vk, then M’Vk = Z1

Using break-even analysis of production, you can prepare information for making many decisions, for example:

1) at what level of production will the firm break even?

2) what volume of production is needed to achieve the target profit?

3) how will a change in variable costs by so many percent affect profits? Fixed costs by such and such an amount?

4) what selling price should be set to achieve the target profit?

5) what additional sales volume is needed due to an increase in fixed costs when the company expands (or an increase in expense items, for example, advertising)?

Let's look at the example of preparing information for operational management decisions.

Example. Lad LLC has current performance indicators (calculated for 1 month).

It is necessary to prepare information for the following questions from managers:

1) What is the production volume at the break-even point?

2) How many products need to be sold to make a profit of 45,000 rubles?

3) If you reduce variable costs by 10%, and fixed costs by 10,000 rubles. without changing sales volumes, what profit can be made?

4) What selling price should be set under existing conditions in order to receive 46,000 rubles from the sale. arrived?

5) What additional sales volume is needed to cover fixed additional costs in the amount of 7,500 rubles. (in connection with the proposal to increase advertising expenses)? Will the new volume remain relevant?

Let's enter the initial data of the task into the form for calculating profit using the marginal income method:

Solution:

0) Calculation of current indicators:

B = B’ × V = 20 × 8000 = 160,000 rub.

Z2 = Z’2 × V = 5 × 8000 = 40,000 rubles.

M = B – Z2 = 160,000 – 40,000 = 120,000 rub.

P = M – Z1 = 120,000 – 90,000 = 30,000 rub.

Revenue structure

Revenue per 1 piece. – 20 rub.

Margin (20 – 5) — 15 rub.

Marginal profit rate

Variable expense percentage 100% - 75% = 25%, or

1) Information for question No. 1

VK = V’ × VK = 20 × 6000 pieces = 120,000 rubles.

To break even, you should sell at least 6,000 pieces of products for a total amount of 120,000 rubles.

2) Information for question No. 2

M = Z1 + P; M = M'V M'V = Z1 + P

B = B’ × V = 20 × 9000 = 180,000 rub.

To make a profit of 45,000 rubles. The company needs to sell 9,000 pieces of products worth 180,000 rubles.

3) Information for question No. 3

The lower the costs, the greater the profit.

P#3 = P0 + P; P = -Z;

Z = Z1 + Z2 = + = -14000

P#3 = 30,000 + 14,000 = 44,000 rubles.

If variable costs are reduced by 10%, profit will increase by 4,000 rubles; with a reduction in fixed costs by 10,000 rubles. profit will increase by 10,000 rubles, total profit will increase by 14,000 rubles. and will amount to 44,000 rubles.

4) Information for question No. 4

B = Z1 + Z2 + P;

To make a profit 46,000 rubles. it is necessary to increase the selling price to 22 rubles.

5) Since profit does not change, to cover the increase in fixed costs by 7,500 rubles. an additional marginal profit of 7,500 rubles is required. The characteristics of a unit of production do not change, so we can use the marginal profit rate indicator
or

Sales volume should be 8000 + 500 = 8500 units, which is within the acceptable range. To cover the additional RUB 7,500. advertising costs, it is necessary to increase sales by 500 products.

To control calculations and provide clarity, we reduce the solution to the problem in the form of calculating profit using the marginal income method.

The calculation examples given are described by the break-even accounting model and are therefore within the acceptable production range.

Many people come across the concept of “margin,” but often do not fully understand what it means. We will try to correct the situation and answer the question of what margin is in simple words, and we’ll also look at what types there are and how to calculate it.

Margin concept

Margin (eng. margin - difference, advantage) is an absolute indicator that reflects how the business operates. Sometimes you can also find another name - gross profit. Its generalized concept shows what the difference is between any two indicators. For example, economic or financial.

Important! If you are in doubt about whether to write walrus or margin, then know that from a grammatical point of view you need to write it with the letter “a”.

This word is used in a variety of areas. It is necessary to distinguish what margin is in trading, on stock exchanges, in insurance companies and banking institutions.

Main types

This term is used in many areas of human activity - there are a large number of its varieties. Let's look at the most widely used ones.

Gross Profit Margin

Gross or gross margin is the percentage of total revenue remaining after variable costs. Such costs may be the purchase of raw materials for production, payment of wages to employees, spending money on marketing goods, etc. It characterizes general work enterprise, determines its net profit, and is also used to calculate other quantities.

Operating profit margin

Operating margin is the ratio of a company's operating profit to its income. It indicates the amount of revenue in percentage, which remains with the company after taking into account the cost of the goods, as well as other related expenses.

Important! High performance speak about the good performance of the company. But be on the lookout because these numbers can be manipulated.

Net Profit Margin

Net margin is the ratio of a company's net profit to its revenue. It displays how many monetary units of profit the company receives from one monetary unit of revenue. After calculating it, it becomes clear how successfully the company copes with its expenses.

It should be noted that the value of the final indicator is influenced by the direction of the enterprise. For example, firms operating in the retail trade tend to have fairly small numbers, while large ones manufacturing enterprises have quite high numbers.

Interest

Interest margin is one of the important indicators activity of the bank, it characterizes the ratio of its income and expenditure parts. It is used to determine the profitability of loan transactions and whether the bank can cover its costs.

This variety can be absolute or relative. Its value can be influenced by inflation rates, various types of active operations, the relationship between the bank’s capital and resources attracted from outside, etc.

Variational

Variation margin (VM) is a value that indicates the possible profit or loss for trading platforms. It is also the number by which the volume can increase or decrease Money taken on bail during trade deal.

If the trader correctly predicted the market movement, then this value will be positive. In the opposite situation it will be negative.

When the session ends, the running VM is added to the account or, vice versa, canceled.

If a trader holds his position for only one session, then the results of the trade transaction will be the same as the VM.

And if a trader holds his position for a long time, it will be added to daily, and ultimately its performance will not be the same as the outcome of the transaction.

Watch a video about what margin is:

Margin and Profit: What's the Difference?

Most people tend to think that the concepts of “margin” and “profit” are identical, and cannot understand the difference between them. However, even if it is insignificant, the difference is still present, and it is important to understand it, especially for people who use these concepts every day.

Recall that margin is the difference between a company's revenue and the cost of the goods it produces. To calculate it, only variable costs are taken into account without taking into account the rest.

Profit is the result of a company’s financial activities at the end of a certain period. That is, these are the funds that remain with the enterprise after taking into account all the costs of production and marketing of goods.

In other words, the margin can be calculated this way: subtract the cost of the product from the revenue. And when profit is calculated, in addition to the cost of the product, various costs, business management costs, interest paid or received, and other types of expenses are also taken into account.

By the way, such words as “back margin” (profit from discounts, bonuses and promotional offers) and “front margin” (profit from markups) are associated with profit.

What is the difference between margin and markup?

To understand the difference between margin and markup, you must first clarify these concepts. If everything is already clear with the first word, then with the second it is not entirely clear.

The markup is the difference between the cost price and the final price of the product. In theory, it should cover all costs: production, delivery, storage and sales.

Therefore, it is clear that the markup is an addition to the cost of production, and the margin does not take this cost into account during calculation.

To make the difference between margin and markup more clear, let’s break it down into several points:
• Different difference. When calculating the markup, they take the difference between the cost of goods and the purchase price, and when calculating the margin, they take the difference between the company’s revenue after sales and the cost of goods.
• Maximum volume. The markup has almost no restrictions, and it can be at least 100, at least 300 percent, but the margin cannot reach such figures.
• Basis of calculation. When calculating the margin, the company's income is taken as the base, and when calculating the markup, the cost is taken.
• Correspondence. Both quantities are always directly proportional to each other. The only thing is that the second indicator cannot exceed the first.

Margin and markup are quite common terms used not only by specialists, but also ordinary people in everyday life, and now you know what their main differences are.

Margin calculation formula

Basic concepts:

G.P.(grossprofit) - gross margin. Reflects the difference between revenue and total costs.

C.M.(contribution margin) - marginal income (marginal profit). The difference between revenue from product sales and variable costs

TR(totalrevenue) – revenue. Income, the product of unit price and production and sales volume.

TC(totalcost) - total costs. Cost price, consisting of all costing items: materials, electricity, wages, depreciation, etc. They are divided into two types of costs – fixed and variable.

F.C.(fixed cost) - fixed costs. Costs that do not change when capacity (production volume) changes, for example, depreciation, director’s salary, etc.

V.C.(variablecost) - variable costs. Costs that increase/decrease due to changes in production volumes, for example, the earnings of key workers, raw materials, materials, etc.

GP = TR - TC

Similarly, the difference between revenue and variable costs will be called Marginal income and is calculated by the formula:

CM = TR - VC

Using only the gross margin (marginal income) indicator, it is impossible to assess the overall financial condition enterprises. These indicators are usually used to calculate a number of other important indicators: contribution margin ratio and gross margin ratio.

K VM = GP/TR

Likewise Marginal Income Ratio equal to the ratio of marginal income to the amount of sales revenue:

K MD = CM / TR

It is also called the contribution margin rate. For industrial enterprises The margin rate is 20%, for trading – 30%.

The gross margin ratio shows how much profit we will make, for example, from one dollar of revenue. If the gross margin ratio is 22%, this means that every dollar will bring us 22 cents in profit.

This value is important when it is necessary to make important decisions about enterprise management. It can be used to predict changes in profits during expected growth or decline in sales.

GP = TC/TR

or variable costs to revenue:

CM = VC/TR

As we already mentioned, the concept of “margin” is used in many areas, and this may be why it can be difficult for an outsider to understand what it is. Let's take a closer look at where it is used and what definitions it gives.

In economics

Economists define it as the difference between the price of a product and its cost. That is, this is actually its main definition.

Important! In Europe, economists explain this concept as the percentage rate of the ratio of profit to product sales at the selling price and use it to understand whether the company’s activities are effective.

In general, when analyzing the results of a company's work, the gross variety is most used, because it is it that has an impact on the net profit, which is used for further development enterprises by increasing fixed capital.

In banking

In banking documentation you can find such a term as credit margin. When a loan agreement is concluded, the amount of goods under this agreement and the amount actually paid to the borrower may be different. This difference is called credit.

When applying for a secured loan, there is a concept called the guarantee margin - the difference between the value of the property issued as collateral and the amount of funds issued.

Almost all banks lend and accept deposits. And in order for the bank to make a profit from this type of activity, different interest rates are set. The difference between the interest rate on loans and deposits is called the bank margin.

In exchange activities

On exchanges they use a variation variety. It is most often used on futures trading platforms. From the name it is clear that it is changeable and cannot have the same meaning. It can be positive if the trades were profitable, or negative if the trades turned out to be unprofitable.

Thus, we can conclude that the term “margin” is not so complicated. Now you can easily calculate it using the formula different kinds, marginal profit, its coefficient and most importantly, you have an idea in what areas this word is used and for what purpose.