Marginal profit is the amount Money, remaining after deducting from the income from sales the costs associated with the production of goods or their purchase. If all other types of expenses are taken away from it, then the net income of the enterprise for the reporting period will be obtained.
Formula for Determining Marginal Profit
Total sales income - all costs associated with the production of goods or their purchase / Total sales income
Thus, if a company earned 250 thousand rubles from the sale of goods that cost it 100 thousand rubles, then its marginal profit will be the difference between revenue and costs as a percentage:
250,000 - 100,000/250,000 = 0.60 or 60%
Why do you need to calculate marginal profit?
The closer your score is to 100%, the better. After all, the higher this indicator, the more money your company has to cover other types of expenses.
In most cases, the figure drops well below 100%: most likely you will get less than 50%.
Marginal profit can be used not only to calculate the profitability of a company, but also to calculate the profitability of each individual product or service line. This helps to determine the feasibility of selling certain goods, as well as adjust their pricing. If the overall profit margin is too low, the viability of the enterprise as a whole is called into question. However, if all other costs are minimal, then it makes sense to continue the business. Additional adjustments in marketing and pricing are also welcome.
Improving the margin indicator
In the case of a low profit margin, look at the fixed costs associated with the product: the cost of material for manufacturing, the cost of shipping, and so on. Try lowering them, and also pay attention to possible increase market price goods or services.
The lower this indicator is, the more difficult it is to keep the business afloat. Don't be afraid to adjust different spending paths. Perhaps moving the firm to another location with a lower rent or downsizing will increase your marginal profit.
Profit margin (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 its calculation, but also to understand what it is used for.
Definition of contribution margin
To begin with, we note that the margin is financial indicator. It reflects the maximum received from a particular type of product or service of the enterprise. Shows how profitable the production and / or sale of these goods or services. Using this indicator, you can assess whether the company will be able to 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/costs (in this article we will assume that these are one and the same). If the revenue is greater than the variable costs, then we will get a profit, otherwise it is a loss.
What is revenue - you can find out.
Profit Margin Formula
As follows from the formula, in the calculation of marginal profit data on revenue and the entire amount of variable costs are used.
Revenue Calculation Formula
Since we calculate the revenue by a certain number of units of goods (that is, from a certain sales volume), then the marginal profit value will be calculated from the same sales volume.
Let us now determine what should be attributed to variable costs.
Definition of variable costs
variable costs These are costs that depend on the volume of goods produced. In contrast to the permanent ones, 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 rent for the 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 necessary for the production of 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 goods, and all the variable costs incurred to produce this volume.
So marginal profit is the difference between revenue and variable costs incurred.
Specific contribution margin
Sometimes it makes sense to use specific indicators to compare the profitability of several products. Specific contribution margin- this is a contribution margin from one unit of production, that is, a margin from a volume equal to one unit of goods.
Profit Margin 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 margin ratio, which expresses the ratio of margin to revenue and is relative.
Calculation examples
Let's give an example of calculating marginal profit.
Assume that a plastic container plant produces three types of products: 1 liter, 5 liters and 10. It is necessary to calculate the marginal profit and the coefficient, knowing the sales revenue and variable costs for 1 unit of each type.
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 p. and 40 r. minus 27 p. - for the third. Dividing the received 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 gives only 33%, in contrast to the first type, which gives 53%. This means that by selling both types of goods for the same amount of revenue, we will get more profit from the first type.
In this example, we calculated the unit margin because we took the data for 1 unit of production.
Let us now consider the margin for one type of product, but with different volumes. At the same time, suppose that with an increase in output 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 the total variable costs from the same volume.
As can be seen from the table, with an increase in volume, profit also grows, 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, this is 1 liter and 5 liters). At the same time, for containers for 1 liter, the maximum production volume is 1500 pcs., And for 5 liters - 1000 pcs. Let us calculate that it is more profitable for us to produce, taking into account the different costs required for the first and second types, and the different revenues that 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 one, 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 with known volumes. In other words, the profit margin ratio represents the proportion 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 is the volume of output for which the margin equals fixed costs.
Let's calculate the marginal profit and the break-even point on the example of the same plant for the production of plastic containers.
For example, the monthly fixed cost of production is 10,000 rubles. Calculate the break-even point for the release of containers in 1l.
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, releasing 1250 units per month, the company will cover all its costs, but at the same time work without profit.
Consider the contribution margin values for different volumes as well.
Let's display the data from the table in a graphical form.
As can be seen from the graph, with a volume of 1250 units, net profit is zero, and our contribution margin is fixed cost. Thus, we found the break-even point in our example.
The difference between gross profit and marginal profit
Consider another principle of cost sharing - direct and indirect. Direct costs are all costs that can be attributed directly to the product/service. While indirect costs are those costs that are not related to the product / service, which the company incurs in the process of work.
For example, direct costs will include raw materials used for production, wage fund for workers involved in the creation of products, and other costs associated with the production and sale of goods. The indirect ones include administration salaries, equipment depreciation (methods for calculating depreciation are described), commissions and interest for using bank loans, etc.
Then there is a difference between revenue and direct costs (or gross profit, “gross”). 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 for its calculation, the amount of direct costs is deducted from revenue, while for marginal profit, the sum of variables is subtracted from revenue. Since direct costs are not always variable (for example, if the staff of workers has an employee whose wages do not depend on the volume of output, that is, the costs for 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, be the cost of resold products. In such a situation, the gross and contribution margins 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, in fact, depends on two indicators (price and variable costs), you need to change at least one of them, and preferably 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 be the costs of transactions with counterparties, as well as with tax and other government bodies. For example, translating the entire interaction into electronic format significantly saves staff time and increases their efficiency, also reduces fare for meetings and business trips.
Even people far from economics are familiar with the terms margin and profit - what is the difference between them and how to calculate these indicators? Often these concepts are used as synonyms, but there are some differences between them. We tell how important they are and why a literate person needs to know them.
To better understand the difference between these concepts, you need to start by defining their content. So, the Russian-language word "profit" usually does not raise questions and is understood as a material advantage received by someone as a result of work or a transaction. In business, it is the end result of work in financial terms.
With the foreign word "margin" is more difficult. It has roots in English and French and is translated primarily as "difference" or "advantage". In modern accounting, the term is most often understood as the difference between the cost of production and its selling price.
Based on the above explanations of the values, Initially, we can conclude that these concepts are actually analogues, because profit is also the difference between the final price and the cost. But in reality this is not entirely true.
Margin is the difference between cost and price for the buyer, and profit is the material benefit of the entrepreneur.
How to distinguish between margin and profit: calculation formulas and main features
How is margin different from profit? We have already found out that the margin is the difference between the cost and the price for the buyer, and the profit is the material benefit of the entrepreneur. But how can this be explained even more simply? To begin with, we will study the formulas by which the considered coefficients are calculated.
Margin formula: what you need to know to calculate
The margin is calculated using a very simple formula: the company's revenue minus the cost of production. That is, if the company's revenue after the sale of products amounted to 10 thousand rubles, and its cost at the same time - 6 thousand rubles, margin is calculated as follows:
- 10,000 - 6,000 = 4,000 rubles.
- (4,000/10,000) x 100% = 40%.
The concept of margin is much closer in meaning to gross profit. Gross profit and margin are actually calculated the same way as the difference between the proceeds and the cost. However, the concept of “net profit” should be distinguished, the difference between which and the margin is more significant.
Net profit formula: how to count and not get confused
The calculation of profit is somewhat more complicated, since it represents the final material result, the final monetary benefit that the entrepreneur will receive after selling the product and paying all related costs.
To find out the profit, you need to subtract from the revenue:
- cost price;
- management costs;
- business expenses;
- tax deductions;
- interest for payment on loans and borrowings (if any);
- any other costs associated with the activities of the enterprise.
Let's go back to the previous example. The revenue is 10 thousand rubles, the cost is 6 thousand, but at the same time, the entrepreneur must pay the bank 5% of the transaction (of all revenue) and pay 500 rubles to the manager, whose labor was not included in the cost of production. Then the net profit will be equal to:
- 10,000 - 6,000 - (10,000x5%) - 500 = 3,000 rubles.
It turns out that the profit from the transaction is less than the margin by a whole thousand rubles. It is clear that we present the most simplified calculations, allowing you to visually depict what a particular indicator is. In practice, all calculations are much more complicated, and the values \u200b\u200bof expenses in the profit formula may not be so obvious.
In practice, all calculations are much more complicated, and the values \u200b\u200bof expenses in the profit formula may not be so obvious.
The difference between margin and profit
Profit is the final, final value of the funds received by the entrepreneur after the sale of products and the payment of all associated costs. It is this indicator that captures how successful the business is.
The margin shows what percentage markup the company makes on its products and thus allows you to draw conclusions about the profitability of the entire work of the organization. Funds received by the enterprise in the form of margin can be used to develop the business.
Related concepts: contribution margin
So, we explained in an accessible language the difference between margin (gross profit) and net profit. But together with these concepts, the combined term “marginal profit” is quite often used. What is it and how does gross profit differ from marginal profit?
So it is customary to call the difference between the proceeds (revenue) and the variable costs of the manufacturer, that is, all the funds spent on the production of a specific volume of products. Variable costs include:
- purchase of raw materials and components, without which it is impossible to manufacture products;
- payment of energy, utility bills;
- wages of employees involved in production.
Fixed costs are not included in margin calculation- interest on loans, property taxes, depreciation, rent, salaries of management personnel. Thus, marginal profit shows how much money was brought in by the sale of products, taking into account the costs of its production, but does not characterize how much net profit the company will receive.
What else you need to know about margin and profit
After reading all the previous paragraphs, it is easy to make sure that the difference between the concepts is quite simple and can be perceived even by people far from the economy. And to entrepreneurs, all the arguments may seem obvious at all. However, let's take a closer look at what else characterizes these concepts:
- Both indicators can be measured both in specific values (in monetary terms) and in percentages, but the margin is more often measured in percentages, and profit - in money.
- The coefficients are interconnected in direct proportion: the greater the margin, the greater the profit.
- Margin will always be greater than profit, since the second is one of its components.
- The meaning of terms may vary depending on the field in which they are used. So in the field of exchange transactions, margin is a pledge that is paid for a loan, the funds of which are planned to be used in an exchange transaction.
Why Calculate These Ratios
Now let's analyze the final question - why calculate these coefficients at all and why can't we limit ourselves to calculating revenue and net profit? Knowing both indicators - margin and profit - will help the entrepreneur to fully evaluate the results of the work. and the ratio of income earned to expenses incurred. The coefficients make it possible to judge the efficiency of resource use, the correctness of pricing and the overall results of the enterprise's work within a specific time cycle.
Marginal profit is the difference between the proceeds from the sale of products that were produced by the enterprise and the costs that appeared as a result of the creation of these products.
A little about margin
Very often it is also called the coverage amount. This can be explained by the fact that it is the revenue that the company receives to cover wages and to create the so-called permanent profit. That is, if the marginal income (profit) is higher each time, then this means that the cost recovery will be carried out faster, and the company will receive more net profit.
Marginal income in Russia
IN Russian Federation the term "marginal profit" is not used as often. With some stretch, we can say that gross profit is practically the same thing, because the meaning of these two operations is very similar. But they also have some differences.
5.2 Calculation of marginal profit for goods, work, services
Gross income when calculating uses non-productive and production costs, but in the marginal approach they are considered more elastic. At the same time, such income is calculated both per unit of sold products and per unit of output. Why is it necessary to calculate it? To get the most accurate information about how much profit each unit of output brings to the company.
At the same time, in Russia there is another important term that is directly related to the money received - the marginal profit of the enterprise. It includes all income from the sale and production of various products.
Very often marginal profit is incorrectly identified with the so-called direct costing system. But they have significant differences that experts in this field are aware of. As a rule, on the territory of the Russian Federation, marginal income is used in the market and industrial sphere of entrepreneurship, because it is here that it brings the maximum result.
When can a company be considered to be making money?
In the event that the analysis of marginal profit shows that the income of the enterprise covers any variable costs well enough, we can say that the profit here exists on high level. At the same time, in the analysis process, it is necessary to take into account the entire range of manufactured goods. Marginal profit also helps to understand which types of products are the most profitable for production in terms of sales, and which are unprofitable or completely unprofitable.
What determines marginal profit and how can it be increased?
As a rule, it primarily depends on the variables on modern market indicators.
This is the cost of manufacturing one unit of goods and the price at which this product can be sold.
In practice, marginal profit can increase. How to get more income?
First, you can mark up your product range several times more. Secondly, you can produce and, accordingly, sell more product. But it is best, of course, to combine these two methods, then you will get higher profits. Of course, these methods seem simple, but sometimes they are not so easy to implement.
First of all, this is due to price competition, which nevertheless dictates its own conditions in setting the price for a particular product. Sometimes it happens that it is impossible to raise the cost of production higher. Also, limits on the cost are often determined by the state, especially for basic necessities. Moreover, it often happens that a large number of cheap products on the market brings a decline in its quality. This, in turn, may lead to the fact that there will be no demand for it.
Determine marginal profit
When an enterprise releases several products at the same time, then marginal profit and its calculation are a very important part of operational analysis. It should also be remembered that the larger the volume of products a company produces, the less cost it will receive per unit of goods. It works and vice versa. Since this necessarily includes the calculation of such fixed costs as renting premises, paying taxes, and so on, the marginal profit, the formula of which
- MP \u003d PE - Zper,
shows how much should cover the costs of production. In this formula, MP shows marginal profit, NP is the net profit of the enterprise, and Zper is variable costs. If your income only covers the costs of the company, then it is at the break-even point.
Why do you need to know what marginal profit your company has?
First of all, this formula will allow you to understand which product you produce is the most in demand on the market in this moment. It is on its manufacture that you need to focus in order to get enough big income. By calculating the margin for each product, you can get an almost complete picture of your company's performance and profitability.
The negative aspects of this method
- There is a linear relationship between costs and revenues, which means that even with an increase in the volume of goods produced, the price in the market may not change. At the same time, at certain points, the cost can also decrease or increase very sharply.
- Fixed and variable costs, which can be considered in terms of relation to the costs per unit of goods, may have other values in terms of conversion. For example, constants can become variables, or vice versa. In this case, the constants will directly depend on the volume of output, and the variables at the moment will not change. This may slightly confuse the information received, which gives us marginal profit (including its calculation).
- Influencing factors will not change. This includes technology, scale of production, labor productivity, labor rates, selling price of products. That is, only volume can be a variable factor.
- Production and sales must be equal in volume.
Marginal profit is an increase in the total amount of profit that was received by the enterprise as a result of the sale of each additional unit of goods. On the other hand, such an economic term can be characterized as the difference between the profit received from the sale and marketing of products or the provision of any services, and the costs of the production process. Thus, marginal profit acts as the so-called coverage amount. This concept clearly illustrates the part of income that is held with the intention of generating benefits in the future. In addition, the above amount can be spent to cover the volume of fixed costs. Therefore, the greater the marginal profit, the more efficiently and quickly the process of returning the funds spent can be carried out. As a result, there is an increase in income that the company in question has.
Gross profit
On the territory of the Russian Federation, this term with a stretch can be considered similar to the concept of "marginal profit". Both of these definitions characterize the receipt of reliable information about increasing the benefits of the organization. The calculation of the above value also allows you to get information about how much the amount of income increases in relation to each newly formed product name or developed service.
Marginal Profit: Calculation Formula
This economic indicator can be calculated both to determine common benefit enterprise as a whole, and for each produced unit of goods. The expression by which the desired value is calculated is quite simple. So, this formula can be represented as follows: marginal profit is calculated from the sum of total income minus variable costs.
Three states
From the analysis of the above formula, we can conclude that there is marginal profit, as well as its size. This is possible because the result of the expression clearly indicates the state of the considered economic indicator. Consider the case when a negative number was obtained as a result of subtraction. Therefore, there is no marginal profit, and the proceeds are not enough to cover variable costs. In the second case, the calculations gave a positive result. This means that not only is there enough revenue to cover costs, but there is also a surplus that can be used to improve efficiency. production process. The third situation considers the option when the result of subtraction is zero. This indicates that the volume of products sold fully covers the resources spent in the manufacturing process, but does not bring profit. Modern scientists call this state the break-even point, since such a result is sufficient to keep the enterprise afloat.
Definition
The concept of "marginal income" is rooted in the English phrase "marginal revenue". This term can be used in several cases. The first application implies the amount of additional profit that arises as a result of the sale of each additional unit of production. In turn, the second option characterizes the desired concept as the revenue that was received after subtracting variable costs. In this state of affairs, marginal income is rightly considered a source that contributes to the formation of profit, as well as a component of covering the amount of fixed costs. The above discrepancy is predetermined by the ambiguity of expressions and terms in English language. The first option corresponds to the concept of "marginal". Thus, the definition under consideration is, as it were, at the limit or on the border of the generally accepted one. The second option identifies the term "revenue margin", which is synonymous with calculating the interest rate difference. At present, scientists around the world more and more often define the desired concept according to the second option. Nevertheless, Russian experts still equate the sought-for term with the expression of marginal income with a stretch.
Formula
Marginal income is equal to the difference between total revenue and variable costs. This expression is the simplest and most understandable way to find the amount of profit of the required type. It should also be noted that the above formula does not take into account the influence exerted by the value of the price and fixed costs. Nevertheless, the share of marginal income in revenue is determined by the amount of the contribution that covers the costs permanent type, and contributes to the formation of the so-called net profit. Finding the size of the concept under consideration is considered particularly interesting in cases where the enterprise produces several types of goods. Therefore, the problem arises of determining which type of product contributes more to the total revenue.
Break even
In the event that marginal income is equal to the amount of fixed costs, experts talk about the so-called break-even point. In other words, the volume of sales of goods and services is at a level where the organization is able to cover all of its costs, while at the same time not receiving any profit. It's a delicate balance between a successful company and a losing company.
Conclusion
From the foregoing, the following conclusion can be drawn. Marginal income is important and necessary economic indicator, which is determined by the amount of profit from each new additionally released unit of goods. Therefore, thanks to this characteristic, the specialists of the accounting department will be able to reliably and more fully fulfill their direct duties, which ultimately consist in compiling the balance sheet of the enterprise.
Red="">Determination of marginal income plays an important role economic role V financial analysis enterprises. Thanks to this indicator, you can establish the relationship between revenue, profit and costs. This relationship is of particular importance when making financial decisions in the field of output.
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What is margin in economics?
How margin is calculated
MP \u003d PE - Zper MP is marginal profit, and state of emergency is the company's net income, Zper
Marginal profit is the difference between the proceeds from the sale of products manufactured by the enterprise (VAT and excises are not taken into account) and the variable costs of production. Marginal profit is sometimes called the coverage amount - that is, the part of the revenue remaining to generate profits and cover fixed costs. The higher the contribution margin, the faster the recovery of fixed costs, and the higher the profit that the company ultimately receives.
As for the terms, in Russia, gross profit can be called an analogue of marginal profit with some stretch. 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 will be equal to fixed costs.
Marginal profit
If the proceeds from the sale of products exceeds all variable costs, we can talk about the amount of marginal profit. If an enterprise produces a wide range of products, then the analysis of this range by marginal profit (marginal analysis) helps to determine the most profitable types of products in terms of possible profitability, and, accordingly, to identify types of products that are not profitable for the enterprise (or even unprofitable). Marginal profit depends on such subject to change in market conditions indicators like price and variable costs. In practice, to increase marginal profit, you need to either increase the margin on goods, or sell more goods, ideally, do both at the same time.
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Not only an experienced head of an enterprise, but even a novice businessman should know what marginal profit is and what a commercial margin is. We offer you to learn everything about this type of profit and about what marginal profit shows.
What is margin in economics?
It is generally accepted that the profit margin is the difference between the cost of goods obtained from the sale prices, as well as interest rates from the quotations established on the exchanges. Often this term can be found in stock trading and in the work of banks, in the fields of insurance and trade. For each specific direction, certain nuances are characteristic. In this case, the margin is indicated as a percentage, or in quantities.
What is marginal profit?
Every entrepreneur should be aware that the contribution margin is the difference between the proceeds from the sale and non-fixed costs. To break even, this type of profit must cover recurring costs. At the same time, it is customary to measure per unit of production and for the whole direction, or division. Marginal profit is the increase in material assets from the sale of a particular product. This type profit equals fixed costs.
What is marginal profit for?
Not every businessman knows? what the margin is for and what the level of profit margin can be. This profit is considered to be the main factor in pricing and profitability of advertising costs. It can maximally reflect the profitability of sales 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 the proceeds from the sale of products and the company's non-permanent expenses. It is called the gross margin.
What is the difference between profit and marginal profit?
Often, novice businessmen are interested in how the concept of marginal profit differs from profit. Among the main differences are:
- 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 sale.
- Margin and profit are proportional. The higher the company's margin, the more revenue you can expect. Therefore, we can say that the main difference between marginal profit and profit is where this concept is used.
How is gross profit different from marginal profit?
Even a novice businessman should understand the difference between marginal and gross profit:
- To calculate gross profit from revenue, the sum of direct costs is calculated, and for marginal profit, the sum of variables is calculated from revenue.
- Gross profit does not always equal marginal profit, since costs are not always variable.
- Gross profit reflects the overall success of the company, and marginal income allows you to choose a profitable way of doing business and determine the type and volume of goods that are produced.
How to calculate marginal profit?
Calculating marginal profit is not so difficult. If the company is engaged in the release of several products at the same time, then marginal profit and its calculation are a significant part of the analysis. The more output a firm produces, the lower its costs.
What is Marginal Profit
It can also work the other way around, as this can include costing.
You can find out about marginal profit using a special formula. Profit Margin Formula MP \u003d PE - Zper indicates how much the cost of production covers. Here MP is marginal profit, and state of emergency is the company's net income, Zper are variable costs. 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 often used analysis based on the study of the ratio of "cost - volume - profit". Cost-Volume-Profit Analysis - this is an analysis of the behavior of costs, which is based on the relationship of costs, revenue (income), production volume and profit, this is a tool for management planning and control. These relationships form the basic model financial activities, which allows the manager to use it for short term planning and assessments alternative solutions. For example, if the volume of production is determined based on the order book, then using this analysis, you can calculate the cost and sale price so that the company can receive a certain amount of profit.
The relationship "costs - volume - profit" can be expressed graphically or using formulas.
On fig. Figure 2 shows the basic cost-volume-profit model. The graph shows the relationship of revenue (income), costs, output, profit or loss. This model is based on a set of fixed relationships. If unit price, cost, efficiency, or other conditions change, then the model must be revised.
| Total income and expenses | ||||
| Total costs | ||||
| Total income | ||||
| Sales volume in units |
Rice. 2. The relationship "costs - profit - production volume"
Analysis of the relationship "costs - 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, is the one in which the total amount of revenue is equal to the total cost. 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 is to find the level of activity (volume of production) when the sales proceeds become equal to the sum of all variable and fixed costs, while the company's profit is equal to zero. To calculate the break-even point, the following methods are used:
Mathematical method (equation method);
Method of marginal profit (income);
Graphic method.
mathematical method based on the formula for calculating the profit of the enterprise. In this case, the relationship "costs - 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 the concept of marginal profit . Marginal profit is the excess of sales revenue over all variable costs associated with a given sales volume. In other words, marginal profit is the difference between sales revenue and variable costs:
In the economic literature, this indicator is often referred to as coverage amount .
Marginal profit - what is it for and what do its indicators say?
Those. on the other hand, the marginal profit should cover the fixed costs of the enterprise and provide it with a profit from the sale of products, works, services.
If we subtract fixed costs from marginal profit, we get the value of operating profit (sales profit):
As a result, the critical point equation for the marginal approach in terms of units of production will be the following:
| Critical volume in sales units | = | fixed costs | fixed costs |
| (Price of 1 unit - PerZ for 1 unit) | Margin. Approx. for 1 unit |
Next, we define the critical point using graphic method using three options. On fig. 3 is a plot of the critical point for mathematical method. This graph consists of two straight lines - a straight line that describes the behavior of total costs (Y2 = A + bX) , and direct, reflecting the behavior of proceeds from the sale of products (works, services, goods) (Y1 \u003d Price of 1 unit × Volume of production) , depending on the change in sales volumes.
In addition, a line is drawn on the diagram 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 "costs - volume - profit" with the mathematical method
The abscissa axis shows the volume of sales in natural units of measurement, the ordinate axis - 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 the sale, at this point the proceeds are equal to the costs, i.e. the point of intersection will indicate the 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 to what extent revenue can fall so that there is no loss. The amount of profit received by the enterprise is determined by the difference between the proceeds from the sale of products and total costs.
On fig. 4 shows the graph for the method contribution margin.
To graphically determine the value of marginal profit, in addition to the lines of revenue and total costs, a line is drawn (Y4 = bX) characterizing the behavior of variable costs when changing business activity enterprises. This line will pass through the origin, parallel to the total cost line (Y2 = bX + A) .
At this method, the critical point can be defined as the point at which the difference between marginal gain and fixed cost is zero, or the point at which marginal gain equals fixed cost.
The option of plotting a graph with this method is considered more preferable, as it allows you to immediately highlight the marginal profit at any point, as the distance between the line of sales revenue and the line of total variable costs.
In any case, in each of the considered graphs financial results(profits and losses) at different levels of sale are determined only by calculation, as the distance between the lines of revenue and gross costs.
Rice. 4. The relationship "costs - volume - profit" with marginal profit
Graphs for determining the break-even point by constructing total costs can be converted into graphs "Profit - Volume". The third variant of the graphical method is considered the most illustrative (Fig. 5).
Rice. 5. Relationship "Profit - Volume"
In this graph, the x-axis represents various levels sales volume, and profit and loss are marked on the y-axis. Profits (or losses) are plotted on the chart for each of the selling levels. These points are connected by a profit line. The zero profit point is located where the profit line crosses the x-axis. If the volume of sales is zero, then the maximum loss will correspond to the amount of fixed costs. As sales increase, marginal profit reduces losses. Each unit of product sold will generate a marginal profit per unit of production, or coverage rate , which is defined as the difference between the selling price of a unit of production and specific variable costs. The break-even point is reached when the total marginal profit is equal to the sum of fixed costs. The sale of each subsequent unit of production will bring profit to the enterprise.
The "Profit - Volume" chart makes it possible to predict the market capacity and break-even volume at different price levels, if the extreme values of prices and demand are set. Using this chart, you can also build a sequential chart to estimate the amount of marginal profit from the activities of different divisions or product groups.
With an increase in the critical volume, the profit of the enterprise decreases. The main factors affecting the value of the critical production volume are:
An increase in fixed costs, leading to an increase in the critical volume of production, respectively, with a decrease in fixed costs, the critical volume of production decreases;
An increase in variable costs per unit of output at a constant price, leading to an increase in the critical volume of production, respectively, with a decrease in variable costs per unit of output, the critical volume of production decreases;
An increase in the selling price at a constant variable cost per unit, resulting in a decrease in the critical volume of production.
Obviously, the critical volume of production 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 profit margin?
Marginal profit
Definition
Marginal profit ( English Contribution Margin) is one of the concepts management accounting and is used in cost-production-profit analysis to determine profitability a certain kind products or services. This indicator can be calculated for a unit of production, for all products, as a coefficient and as a percentage.
This concept is useful in making various management decisions.
- To answer the question of whether to sell an additional batch of products at a lower price.
- To assess profitability at different levels of business activity.
- To select the types of products with the highest profitability. For example, if a business has the potential to produce several types of products, but has insufficient resources to produce all types, preference should be given to the types of products with the highest contribution margin.
Formula
Marginal profit per unit of production
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 are the variable costs per unit of production.
Total contribution margin
It is the difference between revenue and total variable costs.
where S - revenue from product sales, TCV - total variable costs.
Profit Margin Ratio
The coefficient value can be calculated in two ways.
The formulas given above can be transformed as follows.
The coefficient value can also be presented as a percentage. For example, a factor of 0.2 corresponds to 20%.
Schedule
The relationship between the value of the total contribution margin and the volume of product sales is shown in the graph below.
Since sales revenue and total variable costs vary in direct proportion to the level of business activity, total contribution margin increases in proportion to the growth in sales.
Marginal profit per unit, in contrast, remains the same at any level of business activity, provided that the unit price and variable costs per unit remain unchanged. The behavior of this indicator is shown in the chart below.
It should be noted that the value of marginal profit in some circumstances may take negative values. This means that the proceeds from the sale of products do not even cover the variable costs incurred. If these circumstances do not stop, the company's management needs to consider the decision to stop the production and sale of these types of products.
Calculation example
LLC "Retail Fashion LTD" retail store clothes, which sells four types of goods. Data on sales price, variable costs and sales volume in the reporting quarter are presented in the table.
Let's analyze marginal profit based on the above formulas.
CM per Unit Jeans = 85 - 50 = $35
CM per Unit Pants = 50 - 25 = $25
CM per Unit Raglan = 45 - 30 = 15 c.u.
CM per Unit Sweaters = 90 - 60 = $30
S Jeans = 85 × 2,500 = $212,500
S Pants = 50 × 1,700 = $85,000
S Raglans \u003d 45 × 3 250 \u003d 146 250 c.u.
S Sweaters = 90 × 1,300 = $117,000
TVC Jeans = 50 × 2,500 = $125,000
TVC Pants = 25 × 1,700 = $42,500
TVC Raglans = 30 × 3,250 = $97,500
TVC Sweaters = 60 × 1,300 = $78,000
TCM Jeans = $212,500 - $125,000 = $87,500
TCM Pants = $85,000 - $42,500 = $42,500
TCM Raglan = 146,250 - 97,500 = 48,750 c.u.
TCM Sweaters = $117,000 - $78,000 = $39,000
CM Ratio Jeans = 87,500 ÷ 212,500 = 0.412 or 41.2%
CM Ratio Pants = 42,500 ÷ 85,000 = 0.500 or 50.0%
CM Ratio Raglan = 48,750 ÷ 146,250 = 0.333 or 33.3%
CM Ratio Sweaters = 39,000 ÷ 117,000 = 0.333 or 33.3%
The results of the analysis of marginal profit are aggregated in a table.
As you can see from the table, the most marginal product for LLC "Retail Fashion LTD" are trousers, since they bring the maximum profit per 1 c.u. investments.
Marginal profit margin
Critical volume is often found using the concept of marginal profit margin, i.e. share of contribution margin in revenue, usually measured as a percentage
At the critical point P = 0, Mk = Z1 
The threshold revenue is equal to the ratio of fixed costs to the marginal profit margin.
km is also called the margin ratio or product marginality, the revenue ratio. In the example, the rate of marginal profit:
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 \u003d B ' × V) and costs (Z \u003d Z1 + Z'2V) draw lines of revenue and total costs.
Rice. 35. Graph of revenue, costs and profits from sales (production)
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 the proceeds are equal to the costs, Vk = Zk, profit is zero. If the volume of sales is more than critical, the company has a profit, and if it is less, a loss: if V > Vk profit; if V< Vк убыток.
The break-even chart is clearer if, when constructing it, the area of marginal profit is highlighted.
Rice. 36. Profit margin area
As can be seen from the graph, at the critical point Mk = Z1; because Mk \u003d M 'Vk, then M'Vk \u003d Z1 
With the help of a 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 is the volume of production required to obtain the target profit?
3) How will profit be affected by a change in variable costs by so many percent? fixed costs by that amount?
4) what selling price should be set to obtain the target profit?
5) what additional sales volume is needed due to the increase in fixed costs when expanding the company (or an increase in cost items, such as advertising)?
Consider the example of preparing information for operational management decisions.
Example. LLC "Lad" has current performance indicators (calculated for 1 month).
It is necessary to prepare information for the following questions of managers:
1) What is the output at the breakeven point?
2) How many products do you need to sell 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 get 46,000 rubles from the sale. arrived?
5) What additional sales volume is needed to cover fixed additional costs in the amount of 7500 rubles. (in connection with the proposal to increase advertising costs)? Will the new volume remain in the relevance area?
Let's enter the initial data of the problem into the profit calculation form using the marginal income method:
Solution:
0) Calculation of current indicators:
B \u003d B ’ × V \u003d 20 × 8000 \u003d 160,000 rubles.
Z2 \u003d Z'2 × V \u003d 5 × 8000 \u003d 40,000 rubles.
M \u003d B - Z2 \u003d 160,000 - 40,000 \u003d 120,000 rubles.
P \u003d M - Z1 \u003d 120,000 - 90,000 \u003d 30,000 rubles.
Revenue structure
Revenue for 1 pc. - 20 rubles.
Margin (20 - 5) - 15 rubles.
Marginal profit margin 
Percent variable costs 100% - 75% = 25%, or 
1) Information for question number 1
VK \u003d B ’ × VK \u003d 20 × 6000 pieces \u003d 120,000 rubles.
For break-even work, at least 6,000 pieces of products should be sold for a total amount of 120,000 rubles.
2) Information for question number 2
M \u003d Z1 + P; M = M'V M'V = Z1 + P 
B \u003d B ’ × V \u003d 20 × 9000 \u003d 180,000 rubles.
To make a profit of 45,000 rubles. the company needs to sell 9,000 pieces of products in the amount of 180,000 rubles.
3) Information for question number 3
The lower the costs, the higher the profit.
P#3 = P0 + P; P \u003d -Z;
Z = Z1 + Z2 = + = -14000
П№3 \u003d 30,000 + 14,000 \u003d 44,000 rubles.
With a decrease in variable costs by 10%, profit will increase by 4000 rubles; while reducing 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 number 4
B \u003d Z1 + Z2 + P; 
To make a profit of 46,000 rubles. it is necessary to increase the selling price to 22 rubles.
5) Since the profit does not change, then to cover the increase in fixed costs by 7500 rubles. additional marginal profit of 7500 rubles is required. The characteristics of a unit of production do not change, so we can use the rate of marginal profit 
or 
The sales volume should be 8000 + 500 = 8500 pieces, which is within the acceptable range. To cover an additional 7500 rubles. advertising costs, it is necessary to increase sales by 500 products.
For the control of calculations and clarity, we will reduce the solution of the problem to the form of calculating profit using the marginal income method.
| No. p / p | Indicators | Current | Solving the problem on questions | ||||
| for 1 pc. | % | per volume | №1 | №2 | №3 | №4 | №5 |
| 1. | V, pcs. | — | |||||
| 2. | B, rub. | ||||||
| 3. | Z2, rub. | ||||||
| 4. | M, rub. | ||||||
| 5. | Z1, rub. | — | — | ||||
| 6. | P, rub. | — | — | — |
The given examples of calculations are described by the accounting break-even model and, therefore, are in an acceptable range of production.
