Marginal income is the difference between the revenue of an economic entity that it receives from its products (services, works) and the total amount of its variable costs.
This indicator is quantitative, measured in monetary units. The value of the indicator reflects the contribution of the enterprise that it can make to cover fixed costs in order to make a profit (that is, such income directly affects the amount of actually received profit).
Marginal revenue can be determined in two ways. First: all direct costs and the associated overhead (or variable) costs are deducted from the revenue for the products sold . Second: fixed costs are summed up with the profit of the enterprise.
There is a concept of the average value of marginal costs. By it is understood the difference between the average variable costs and the price of the product itself. This indicator reflects the contribution of each unit of production to the costs of the enterprise and profit.
The essence of marginal income, in general, is that the amount of excess of variable costs by income shows how much the company is able to cover its fixed costs and make a profit.
The specific share of marginal income in revenue is determined by preliminary calculation of the marginal income coefficient. This ratio is equal to the ratio of marginal income to the company's revenue.
If the indicator is zero, it means that sales revenue can only cover variable costs, that is, the company incurs losses equal to the amount of fixed costs.
If the indicator is above zero, but does not exceed fixed costs, then we can say that with the proceeds from the sale it is possible to cover all the variables and part of the fixed costs. The loss in this case will be less than fixed costs.
In a situation where the marginal income equals fixed costs, sales revenue is able to cover both variable and fixed costs. In this situation, the company does not bear a loss.
If fixed costs are exceeded by marginal income, the company can not only cover its costs, but also make a profit.
Thus, the revenue margin, along with the income indicator, is the most important source of data for calculating the threshold indicators that are used in the operational analysis of the enterprise and determining the financial results of its activities.
Determination of the financial result of the activity makes it possible to determine the amount of profit that characterizes the result of sales. These data allow you to make decisions regarding the supply, further production and marketing of products.
The method of calculating the financial result using the margin income indicator is called a prospective analysis tool. Moreover, the revenue from sales is compared only with variable costs for a certain type of product. The indicators for each type of product are calculated. The difference in these indicators expresses the share of one type of product in covering costs. The sum of all fixed costs is deducted from the sum of all fixed costs. As a result, the degree of participation of each product in the recovery of these costs (that is, in achieving profit) becomes known.
Marginal income affects the adoption of a number of strategic decisions on the conduct of production policies. Such decisions include the following: the feasibility of further promoting a particular product on the sales markets, the need for additional orders for production, and the prospect of cooperation with each group of customers. By and large, marginal revenue determines, in general, the effectiveness and efficiency of the enterprise.