Limit values may seem to be purely theoretical and not related to the actual conduct of business at the enterprise only because of the lack of practice in working with them during the Soviet and perestroika periods. In fact, marginal values are the most effective way to track the potential for increasing profits, which all enterprises strive for without exception. As for their logic and calculation, it does not represent anything more complicated than elementary algebra.
Marginal revenue - this is the additional income that the company receives from the sale of an additional unit of goods. It is one of the main limit values that have a direct relationship with profit and price - two of the most important indicators of the company. Marginal revenue is a value that has a different value depending on the company's sales . Thus, to carry out the analysis using marginal revenue, it is necessary to compile a table reflecting the change in this value with changes in sales.
To make it clearer, we give the definition of marginal revenue. Marginal revenue is the change in the total revenue of the company, as a result of the growth of sales by one conventional unit. For example, your company sold 20 units of products at 10 rubles each. Then , sales increased by one, but the price remained the same. In this case, the marginal income will be equal to 20 rubles.
It may seem that at a constant price, marginal revenue will always be equal to the value of this price itself, and therefore it makes no sense to further calculate this indicator. However, it is not. As you know, with the growth in sales, the company is forced to lower the price in order to attract those buyers who will not buy goods at this price. It turns out that you benefit from an increase in volumes, but lose from the fact that all products are slightly cheaper. In order to determine what outweighs - gain or loss - and marginal revenue, also known as marginal revenue, is used.
Let us give an example: as a result of growth in sales from twenty units to twenty one units of production, the price of one unit fell to 9 rubles and 50 kopecks. In this case, our new total income will be equal to 199.5 rubles, which is 50 kopecks less than the income with old volumes. It turns out that marginal revenue is -50 kopecks. As it turned out, to increase sales for the company is not profitable.
The above example showed how limit values are used in management. If the marginal values of revenue fall below zero, then the company needs to stop extensive growth and restrain the growth of production volumes in order to keep prices at an acceptable level. As long as marginal revenue remains positive, there is the prospect of increasing volumes.
However, this analysis is somewhat incomplete. If marginal revenue is positive, we also need to analyze the marginal cost of the enterprise. Marginal costs show how much costs have changed as a result of sales growth. According to elementary logic, this value will be positive, since each new unit of production requires the cost of its production. On the other hand, the more units of goods are produced, the less fixed costs are per unit of output until the production capacities are fully loaded.
In any case, if marginal revenue is greater than marginal cost, then we get marginal profit, which means we need to increase sales. As a rule, this happens until new equipment for production is needed or active sales reduce the prices on the market.