Marginal analysis and its role in obtaining maximum profit by the enterprise

Marginal analysis plays an important role in justifying accepted management decisions in various types of business. Its second name is the limit analysis.

The methodology of the margin analysis is based on the comparison of three groups of important economic indicators: "costs - income - profit". Based on the results of such a study, the critical and optimal value of each of these indices is predicted at a given value of the others. This method of calculating managerial decisions has a second name - analysis of breakeven or promotion of income.

Marginal analysis can serve to find more advantageous combinations between fixed costs, variable costs per unit of output, sales volume and price. That is why all costs must be divided into fixed and variable.

Marginal analysis of profits is carried out in comparison with the marginal income, which is calculated as sales proceeds minus the variable costs that fall on this realization. Based on the definition, we can say with confidence that marginal revenue includes both fixed costs and profits.

To study the factors of change in the amount of profit and forecast its optimal value, the margin analysis provides the following formula:

Пр = ОР * (Ц - ПерЗ) - ПЗ, where ОР - volume of realization of certain production; C - unit price; PerZ - variable costs per unit of output; PZ - constant costs of all sales of the same type of products.

This formula can be used to analyze the profit obtained 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, apart from a direct effect on the sales profit, also indirect. Due to such features of the application of these calculations, it becomes possible to determine precisely the influence of factors on changes in the amount of profit.

People who have organized their own business, want to constantly get the maximum net 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 products produced, or the number of purchased resources. In the case of trading activities, the control variable may be the choice of priority in the procurement of goods (or food, or clothing).

It is the margin analysis that can answer the actual question of any businessman about whether the maximum result will be obtained with an increase in the control variable for at least one more.

The main principles of margin analysis are:

- selection of the control variable;

- Calculation of marginal revenue, which provides a degree of increase in gross income with a simultaneous increase in the control variable by one;

- Calculation of marginal costs showing the level of changes in gross costs with a simultaneous increase in the control variable by one unit;

- comparison of these two indicators.

If the marginal revenue exceeds the marginal cost, it is advisable to increase the control variable, otherwise it does not.

Proceeding from what has been said, we can conclude that marginal analysis helps the business entity reliably evaluate the results of entrepreneurial activity and predict their optimal value for the future.