An important role in the justification of management decisions made in various types of business is played by marginal analysis. Its second name is marginal analysis.
The methodology of marginal analysis is based on a comparison of three groups of important economic indicators: "costs - income - profit." Based on the results of such a study, a critical and optimal value of each of these indicators is predicted for a given value of others. This method of calculating management decisions also has a second name - break-even analysis or revenue promotion.
Margin analysis can serve to find more profitable combinations between fixed costs, variable costs per unit of output, sales volume and price. That is why all costs should be divided into fixed and variable.
Margin analysis of profit is carried out in comparison with marginal income, which is calculated as revenue from sales minus the variable costs that are incurred in this sale. Based on the definition, it is safe to say that marginal income includes both fixed costs and profits.
To study the factors of changing the amount of profit and forecasting its optimal value, margin analysis provides the following formula:
Pr = OP * (C - PerZ) - PZ, where PR is the volume of sales of a certain product; C is the price of a unit of production; PerZ - variable costs per unit of output; PZ - fixed costs of the total sales of the same type of product.
This formula can be used in the analysis of profits from the sale of certain types of products. Allows you to evaluate its changes due to the total number of sales, the level of variables and fixed costs, as well as prices. This calculation takes into account, in addition to the direct effect on the profit of sales, also indirect. Thanks to such features of the application of these calculations, it becomes possible to accurately determine the influence of factors on changes in the amount of profit.
The people who organized their business want constant maximum income, i.e. reducing the difference between income and costs. To achieve their goal, they can change a certain parameter of activity, which is quite important and has the name “control variable”.
So, if the enterprise is engaged in production, then the head can regulate either the volume of output, or the amount of purchased resources. In the case of trading activities, the choice of priority when purchasing goods (either food or clothing) can serve as a control variable.
It is marginal analysis that can provide an answer to the urgent question of any businessman about whether the maximum result will be obtained with an increase in the control variable by at least one more.
The main principles of marginal analysis are:
- choice of control variable;
- Calculation of marginal income, which provides for the degree of increase in gross income while increasing the control variable by one;
- calculation of marginal costs, showing the level of change in gross costs with a simultaneous increase in the control variable by one unit;
- Comparison of these two indicators.
If the marginal income exceeds the marginal cost, it is advisable to increase the control variable, otherwise not.
Based on the foregoing, it can be concluded that marginal analysis helps the business entity to reliably evaluate the results of entrepreneurial activity and to predict their optimal value for the future.