Marginal revenue is an indicator of the profitability of a business

Modern entrepreneurs do not often use the calculation of marginal revenue indicators in their practice, but in vain, because with their help it is possible to prepare a financial forecast of activity in advance. Marginal revenue is the difference between revenue from sales and variable costs. Sometimes it is also referred to as the amount of coverage, the part that goes from revenue to recovering fixed costs and making a profit.

This term is usually used immediately in two ways: marginal profit and sales income received after covering variable costs. The first definition involves calculating the profit for the sale of each subsequent unit of output. In the second case, the source of coverage for fixed costs and income generation is implied.

For each manager it is very important to correctly calculate the marginal revenue. Its formula is very simple, it is necessary to find the difference between sales volumes multiplied by the sales price and sales volumes multiplied by the cost of direct costs per unit of goods. For greater convenience, you can calculate the indicator per unit of output, you need to find the difference between the sales price and the direct costs of producing a unit of goods.

In most cases, in our country, only in the sphere of trade do they calculate the marginal revenue, this, in fact, is a trade mark-up. In foreign companies this indicator plays a huge role in drawing up financial plans, forecasting further output. To get the right values, it's important not to be mistaken and take the necessary indicators, because then it will be unclear whether the business brings profit or not.

In large companies, marginal revenue is calculated for each product. This allows you to find out how profitable or unprofitable this or that commodity is. If the indicator is negative, then the output should be suspended, because with each subsequent unit the firm will be increasingly at a loss. Marginal analysis allows you to determine which issue of the product is profitable, and which is better to withdraw from production. Using the breakeven model, you can determine, starting with what volume of sales or services performed, the enterprise starts to receive revenue.

Marginal revenue is a significant indicator, tracked with statistics by product type, different industries and activities. Knowing its industry standard, you can easily calculate the direct costs and revenue. It should be borne in mind that the business will be profitable only if the amount of marginal revenue completely covers taxes, total costs, and still there will be profit. If this amount is not enough even to cover costs, then production is considered unprofitable.

To correctly calculate the margin income, you need to determine the direct costs. These include costs tied to a unit of output, such as labor costs or the cost of materials. Total costs include everything else, they are covered by marginal revenue. If everything is correctly calculated, the total costs will not practically change, because they include the cost of renting premises, salary of full-time employees, utilities, etc.