Margin is seen as a key factor in pricing and the profitability of marketing expenses. It fully reflects the profitability of sales, being the difference between the cost and selling price. As a rule, margin is expressed as profit per unit of goods or as a percentage of the selling price.
There is an indicator characterizing the difference between the total revenue from the sale of goods and variable costs of the company. It is called gross margin. Based on it, it is impossible to assess the general state of finances in an enterprise or a specific line of business. However, this indicator is used in the calculation of a number of other quantities. So, for example, its ratio to the amount of revenue forms the gross margin ratio.
The difference between the total sales profit and variable costs is the basis for determining net profit in the company. Thus, the gross margin is considered as an analytical value that characterizes the result of the organization as a whole. This indicator is formed on the basis of employee labor invested in the production of goods (provision of services).
The gross margin reflects the cash-generated surplus formed by the company. In this indicator, in addition, income from non-operating business operations of the organization can be taken into account. Non-operating profit includes the balance of operations to describe accounts payable and receivable, to carry out activities within the housing and communal sector of the economy, to carry out operations on non-industrial types of services, etc.
Marginal profit is the difference between the income from the sale of goods produced by the organization (excluding excise taxes and VAT) and variable production costs. Sometimes this indicator is called the amount of coverage. In this case, the marginal profit is considered as part of the revenue that remains on the creation of profit and reimbursement of fixed costs. The higher the amount of coverage, the faster the costs will be recovered, the higher will be the income that the company will receive as a result.
Marginal profit (TRm) can be calculated per unit of manufactured and sold goods. This calculation allows you to get information about the increase in income due to the manufacture of each new unit of production.
Marginal profit. Formula
TRm = TR - TVC, where variable costs - TVC, total revenue - TR.
If the sales volume reimburses all the costs of the enterprise while the income is not provided, then the marginal profit is equal to fixed costs.
Income from the sale of goods may exceed variable costs. In this case, the marginal profit is of a certain size.
When a company produces a wide range of products, this indicator can identify the most promising profitable types of goods. Along with this, unprofitable (or unprofitable) goods for the enterprise are also determined. In other words, it becomes possible to identify which of them make the greatest contribution to the income of the enterprise as a whole, and which bring the greatest loss. To do this, determine what proportion of the marginal profit in income for each individual type of product.
The amount of calculation depends on variable costs and prices - quite variable values. As practice shows, to increase the indicator of the indicated income, one should either increase the margin on the product, or realize a larger volume of it, and ideally, implement both.
Thus, marginal profit should be considered as fixed income and expenses, a contribution to the formation of net income and reimbursement of fixed costs.