Marginal profit (in other words, “margin”, contribution margin) is one of the main indicators for assessing the success of an enterprise. It is important not only to know the formula for calculating it, but also to understand what it is used for.
Determination of marginal profit
To begin with, we note that margin is financial indicator. It reflects the maximum received from a particular type of product or service of an enterprise. Shows how profitable the production and/or sale of these goods or services is. Using this indicator, you can assess whether the enterprise will be able to cover its fixed costs.
Any profit is the difference between income (or revenue) and some costs (costs). The only question is what costs we need to take into account in this indicator.
Marginal profit/loss is revenue minus variable costs/expenses (in this article we will assume that these are the same thing). If revenue is greater than variable costs, then we will make a profit, otherwise it is a loss.
You can find out what revenue is.
Formula for calculating marginal profit
As follows from the formula, the calculation of marginal profit uses revenue data and the entire amount of variable costs.
Formula for calculating revenue
Since we calculate revenue based on a certain number of units of goods (that is, from a certain sales volume), then the value of marginal profit will be calculated from the same sales volume.
Let us now determine what should be classified as variable costs.
Determination of variable costs
Variable costs- These are costs that depend on the volume of goods produced. Unlike constants, which the enterprise bears in any case variable costs appear only during production. Thus, if such production is stopped variable costs for this product disappear.
An example of fixed costs in the production of plastic containers is the rental fee for premises necessary for the operation of the enterprise, which does not depend on the volume of production. Examples of variables are the raw materials and materials needed to produce products, as well as the wages of employees, if it depends on the volume of this output.
As we can see, the contribution margin is calculated for a certain volume of production. At the same time, for the calculation it is necessary to know the price at which we sell the product and all the variable costs incurred to produce this volume.
This means that contribution margin is the difference between revenue and variable costs incurred.
Specific marginal profit
Sometimes it makes sense to use unit indicators to compare the profitability of several products. Specific marginal profit– this is the contribution margin from one unit of production, that is, the margin from a volume equal to one unit of goods.
Marginal profit ratio
All calculated values are absolute, that is, expressed in conventional monetary units (for example, in rubles). In cases where an enterprise produces more than one type of product, it may be more rational to use contribution margin ratio, which expresses the ratio of margin to revenue and is relative.
Calculation examples
Let's give an example of calculating marginal profit.
Let's assume that a plastic packaging plant produces three types: per 1 liter, per 5 liters and per 10. It is necessary to calculate the marginal profit and coefficient, knowing the sales income and variable costs for 1 unit of each type.
Let us recall that marginal profit is calculated as the difference between revenue and variable costs, that is, for the first product it is 15 rubles. minus 7 rubles, for the second - 25 rubles. minus 15 rub. and 40 rub. minus 27 rub. - for the third. Dividing the obtained data by revenue, we get the margin ratio.
As we can see, the third type of product gives the highest margin. However, in relation to the revenue received per unit of goods this product gives only 33%, in contrast to the first type, which gives 53%. This means that by selling both types of goods for the same amount of revenue, we will receive more profit from the first type.
In this example, we calculated the specific margin because we took data for 1 unit of production.
Let us now consider the margin for one type of product, but for different volumes. At the same time, let’s assume that with an increase in production volume to certain values, variable costs per unit of production decrease (for example, a supplier of raw materials makes a discount when ordering a larger volume).
In this case, marginal profit is defined as revenue from the entire volume minus total variable costs from the same volume.
As can be seen from the table, as volume increases, profit also increases, but the relationship is not linear, since variable costs decrease as volume increases.
Another example.
Suppose our equipment allows us to produce one of two types of products per month (in our case, 1 liter and 5 liters). At the same time, for 1L containers the maximum production volume is 1500 pcs., and for 5L containers - 1000 pcs. Let's calculate what is more profitable for us to produce, taking into account the different costs required for the first and second types, and the different revenues they provide.
As is clear from the example, even taking into account the higher revenue from the second type of product, it is more profitable to produce the first, since the final margin is higher. This was previously shown by the contribution margin coefficient, which we calculated in the first example. Knowing it, you can determine in advance which products are more profitable to produce at known volumes. In other words, the contribution margin ratio represents the percentage of revenue that we will receive as margin.
Break even
When starting a new production from scratch, it is important for us to understand when the enterprise will be able to provide sufficient profitability to cover all costs. To do this, we introduce the concept break even- this is the volume of output for which the margin is equal to fixed costs.
Let's calculate the marginal profit and break-even point using the example of the same plastic container production plant.
For example, monthly fixed costs in production are 10,000 rubles. Let's calculate the break-even point for the production of 1 liter containers.
To solve, subtract variable costs from the selling price (we get the specific contribution margin) and divide the amount fixed costs to the resulting value, that is:
Thus, by producing 1250 units monthly, the enterprise will cover all its costs, but at the same time operate without profit.
Let's consider the contribution margin values for different volumes.
Let's display the data from the table in graphical form.
As can be seen from the graph, with a volume of 1250 units, net profit is zero, and our contribution margin is equal to fixed costs. Thus, we found the break-even point in our example.
The difference between gross profit and marginal profit
Let's consider another principle of dividing costs - into direct and indirect. Direct costs are all costs that can be attributed directly to the product/service. While indirect are those costs not related to the product/service that the enterprise incurs in the process of work.
For example, direct costs will include raw materials used for production, wages for workers involved in creating products, and other costs associated with the production and sale of goods. Indirect ones include wages administration, depreciation of equipment (methods for calculating depreciation are described), commissions and interest for the use of bank loans, etc.
Then the difference between revenue and direct costs is (or gross profit, “shaft”). At the same time, many people confuse the shaft with the margin, since the difference between direct and variable costs is not always transparent and obvious.
In other words, gross profit differs from marginal profit in that to calculate it, the sum of direct costs is subtracted from revenue, while for marginal profit, the sum of variables is subtracted from revenue. Since direct costs are not always variable (for example, if there is an employee on the staff whose salary does not depend on the volume of output, that is, the costs of this employee are direct, but not variable), then gross profit is not always equal to marginal profit.
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If the enterprise is not engaged in production, but, for example, only resells the purchased goods, then in this case both direct and variable costs will, in fact, constitute the cost of the resold products. In such a situation, the gross and contribution margin will be equal.
It is worth mentioning that the gross profit indicator is more often used in Western companies. In IFRS, for example, there is neither gross nor marginal profit.
To increase the margin, which essentially depends on two indicators (price and variable costs), it is necessary to change at least one of them, or better yet, both. That is:
- raise the price of a product/service;
- reduce variable costs by reducing the cost of producing 1 unit of goods.
To reduce variable costs the best option may include expenses for conducting transactions with counterparties, as well as with tax and other government agencies. For example, transferring all interactions into electronic format significantly saves staff time and increases their efficiency; fare for meetings and business trips.
Products and variable costs. Sometimes the definition is used. This calculated indicator does not allow one to characterize the financial condition of the company, but it is necessary when calculating many indicators.
Thus, the ratio of marginal income to the amount of revenue received from the sale of goods determines the gross margin ratio. for materials and raw materials for main production, sales costs, wages of main production workers, etc.
Directly proportional to production volume. The company is interested in keeping costs per unit of output lower, as this allows them to make more profit. When the volume of output of goods changes, costs increase (decrease) accordingly, but per unit of output they have a constant, unchanged value.
Sales proceeds are calculated by taking into account all receipts that are associated with payments, expressed in kind or in cash, for goods, services, work or property rights.
Gross margin shows how much a business has contributed to generate profits and cover fixed costs. The gross margin is determined in two ways.
In the first case, any or variable costs, as well as part of overhead (overhead) costs, which are variable and depend on the volume of production, are subtracted from the company’s revenue received for goods sold. In the second way, gross margin is calculated by adding the company's profit and fixed costs.
There is also such a thing as the average gross margin. IN in this case the difference between price and average costs (variables) is taken. This category shows how much a unit of product contributes to profit and how it covers fixed costs.
The gross margin rate is understood as the share of marginal income in revenue, or for an individual product - the share of income in the price of the product. These indicators allow you to solve various production problems. For example, using the described coefficients you can determine profit for different production volumes. To better understand the economic meaning of the gross margin indicator, we can consider the following problem.
Let's say a manufacturing company produces and sells goods, the production and sales of which have average variable costs of 100 rubles per unit. The product itself is sold at a price of 150 rubles per unit. The company's fixed costs amount to 150 thousand rubles monthly. It is necessary to calculate how much profit the company will have per month if sales are 4000 units, 5000 units, 6000 units.
At the first stage of the decision, it is necessary to determine what value the gross margin and profit will take for each option, since fixed costs do not depend on production volume. can be determined for any production volume. To do this, you need to multiply the average gross margin by the volume of production, the result will be the total marginal income.
From the example shown, you can see that increasing profits can be achieved by increasing the gross margin. To do this, you should reduce the selling price and increase sales volume, or reduce fixed costs and increase sales volume, or proportionally change costs (fixed and variable) and output.
Often economic terms ambiguous and confusing. The meaning inherent in them is intuitively clear, but to explain it in publicly available words, without preliminary preparation, rarely does anyone succeed. But there are exceptions to this rule. It happens that a term is familiar, but upon in-depth study it becomes clear that absolutely all its meanings are known only to a narrow circle of professionals.
Everyone has heard, but few people know
Let’s take the term “margin” as an example. The word is simple and, one might say, ordinary. Very often it is present in the speech of people who are far from economics or stock trading.
Most believe that margin is the difference between any similar indicators. In daily communication, the word is used in the process of discussing trading profits.
Few people know absolutely all the meanings of this fairly broad concept.
However to modern man It is necessary to understand all the meanings of this term, so that at an unexpected moment you “don’t lose face.”
Margin in economics
Economic theory says that margin is the difference between the price of a product and its cost. In other words, it reflects how effectively the activities of the enterprise contribute to the transformation of income into profit.
Margin is a relative indicator; it is expressed as a percentage.
Margin=Profit/Revenue*100.
The formula is quite simple, but in order not to get confused at the very beginning of studying the term, let's consider a simple example. The company operates with a margin of 30%, which means that in every ruble earned, 30 kopecks constitute net profit, and the remaining 70 kopecks are expenses.
Gross Margin
In analyzing the profitability of an enterprise, the main indicator of the result of the activities carried out is the gross margin. The formula for calculating it is the difference between revenue from sales of products during the reporting period and variable costs for the production of these products.
The level of gross margin alone does not allow for a full assessment financial condition enterprises. Also, with its help, it is impossible to fully analyze individual aspects of its activities. This is an analytical indicator. It demonstrates how successful the company is as a whole. is created through the labor of enterprise employees spent on the production of products or provision of services.
It is worth noting one more nuance that must be taken into account when calculating such an indicator as “gross margin”. The formula can also take into account income outside of sales economic activity enterprises. These include writing off accounts receivable and payable, providing non-industrial services, income from housing and communal services, etc.
It is extremely important for an analyst to correctly calculate the gross margin, since enterprises, and subsequently development funds, are formed from this indicator.
In economic analysis, there is another concept similar to gross margin, it is called “profit margin” and shows the profitability of sales. That is, the share of profit in total revenue.
Banks and margin
The bank's profit and its sources demonstrate whole line indicators. To analyze the work of such institutions, it is customary to count as many as four various options margin:
The ability to trade on financial markets without having enough money in your account large sums. This makes margin trading highly profitable business. However, when participating in operations, one should not forget that the level of risk is also not small.
Opportunity to receive when the market value of shares decreases (in cases where the client borrows securities from a broker).
To trade different currencies, it is not necessary to have funds in these particular currencies on your deposit.
Credit margin is directly related to work under loan agreements and is defined as the difference between the amount specified in the document and the amount actually issued.
Bank margin is calculated as the difference between interest rates on loans and deposits.
Net interest margin is a key indicator of banking performance. The formula for its calculation looks like the ratio of the difference in commission income and expenses for all operations to all bank assets. Net margin can be calculated based on all the bank’s assets, or only on those currently involved in work.
The guarantee margin is the difference between the estimated value of the collateral property and the amount issued to the borrower.
Such different meanings
Of course, economics does not like discrepancies, but in the case of understanding the meaning of the term “margin” this happens. Of course, on the territory of the same state, everyone is completely consistent with each other. However Russian understanding The term "margin" in trading is very different from the European one. In the reports of foreign analysts, it represents the ratio of profit from the sale of a product to its selling price. In this case, the margin is expressed as a percentage. This value is used for relative efficiency assessment trading activities companies. It is worth noting that the European attitude towards margin calculation is fully consistent with the basics economic theory, which were written above.
In Russia, this term is understood as net profit. That is, when making calculations, they simply replace one term with another. For the most part, for our compatriots, margin is the difference between revenue from the sale of a product and overhead costs for its production (purchase), delivery, and sales. It is expressed in rubles or other currency convenient for settlements. It can be added that the attitude towards margin among professionals is not much different from the principle of using the term in everyday life.
How does margin differ from trading margin?
There are a number of common misconceptions about the term “margin”. Some of them have already been described, but we have not yet touched on the most common one.
Most often, the margin indicator is confused with the trading margin. It's very easy to tell the difference between them. The markup is the ratio of profit to cost. We have already written above about how to calculate margin.
A clear example will help dispel any doubts that may arise.
Let’s say a company bought a product for 100 rubles and sold it for 150.
Let's calculate the trade margin: (150-100)/100=0.5. The calculation showed that the markup is 50% of the cost of the goods. In the case of margin, the calculations will look like this: (150-100)/150=0.33. The calculation showed a margin of 33.3%.
Correct analysis of indicators
For a professional analyst, it is very important not only to be able to calculate an indicator, but also to give a competent interpretation of it. This hard work which requires
great experience.
Why is this so important?
Financial indicators are quite conditional. They are influenced by valuation methods, accounting principles, conditions in which the enterprise operates, changes in the purchasing power of the currency, etc. Therefore, the resulting calculation result cannot be immediately interpreted as “bad” or “good”. Additional analysis should always be performed.
Margin on stock markets
Exchange margin is a very specific indicator. In the professional slang of brokers and traders, it does not mean profit at all, as was the case in all the cases described above. Margin on stock markets becomes a kind of collateral when making transactions, and the service of such trading is called “margin trading”.
The principle of margin trading is as follows: when concluding a transaction, the investor does not pay the entire contract amount in full, he uses his broker, and only a small deposit is debited from his own account. If the outcome of the operation carried out by the investor is negative, the loss is covered from the security deposit. And in the opposite situation, the profit is credited to the same deposit.
Margin transactions provide the opportunity not only to make purchases using borrowed funds from the broker. The client may also sell borrowed securities. In this case, the debt will have to be repaid with the same securities, but their purchase is made a little later.
Each broker gives its investors the right to make margin transactions independently. At any time, he may refuse to provide such a service.
Benefits of Margin Trading
By participating in margin transactions, investors receive a number of benefits:
Management of risks
To minimize the risk when concluding margin transactions, the broker assigns each of its investors a collateral amount and a margin level. In each specific case, the calculation is made individually. For example, if after a transaction there is a negative balance in the investor’s account, the margin level is determined by the following formula:
UrM=(DK+SA-ZI)/(DK+SA), where:
DK - cash investor deposited;
CA - the value of shares and other investor securities accepted by the broker as collateral;
ZI is the debt of the investor to the broker for the loan.
It is possible to carry out an investigation only if the margin level is at least 50%, and unless otherwise provided in the agreement with the client. According to general rules, the broker cannot enter into transactions that would result in the margin level falling below the established limit.
In addition to this requirement, for carrying out margin transactions on the stock markets, a number of conditions are put forward, designed to streamline and secure the relationship between the broker and the investor. The maximum amount of loss, debt repayment terms, conditions for changing the contract and much more are discussed.
Understand all the diversity of the term "margin" for short term It's hard enough. Unfortunately, it is impossible to talk about all areas of its application in one article. The above discussions indicate only the key points of its use.
PROFITABILITY THRESHOLD
BASIC CONCEPTS OF OPERATIONAL ANALYSIS, PROFITABILITY THRESHOLD, GROSS MARGIN, FINANCIAL STRENGTH AND OPERATING LEVERAGE.
Operational analysis (cost-volume-profit)- analysis of the results of the enterprise’s activities based on the ratio of production volumes, profits and costs, allowing to determine the relationship between costs and income at different production volumes
Profitability threshold (break-even point, critical point, critical volume of production (sales)) is the volume of sales of a company at which sales revenue fully covers all costs of production and sales of products. To determine this point, regardless of the methodology used, it is necessary first of all to divide the projected costs into fixed and variable.
The profitability threshold is such sales revenue at which the enterprise no longer has losses, but still does not have profits. The gross margin is exactly enough to cover fixed costs, and the profit is zero, i.e.
Profit = Gross Margin – Fixed Costs = 0
The difference between the achieved actual sales revenue and the profitability threshold constitutes the margin of financial strength of the enterprise. If sales revenue falls below the profitability threshold, then the financial position of the enterprise worsens and a liquidity deficit occurs, that is
Margin of financial strength = Sales revenue – Profitability threshold
According to the “direct costing” system, accounting and reporting at enterprises are organized in such a way that it becomes possible to regularly monitor data according to the “cost – volume – profit” scheme. The marginal income of an enterprise (gross margin) is revenue minus variable costs. The contribution margin per unit of production is the difference between the price of that unit and its variable costs.
Gross margin is gross profit commercial organization, expressed as a percentage of the company's revenue.
The difference between revenue from product sales and variable costs. V.m. is a calculated indicator; in itself it does not characterize the financial condition of the enterprise or any aspect of it, but is used in the calculations of a number of indicators. The ratio of gross margin to the amount of revenue from sales of products is called the gross margin ratio.
Margin of financial strength - the ratio of the difference between the current sales volume and the sales volume at the break-even point to the current sales volume, expressed as a percentage
How far the company is from the break-even point shows the margin of financial strength. This is the difference between the actual output and the output at the break-even point. The percentage ratio of the financial safety margin to the actual volume is often calculated. This value shows by how many percent the sales volume can be reduced in order for the company to avoid losses.
Let us introduce the notation: B - sales revenue.
Рн - sales volume in physical terms.
Tbd is the break-even point in monetary terms.
Tbn is the break-even point in physical terms.
Formula for financial safety margin in monetary terms:
ZPd = (B -Tbd)/B * 100%, where
ZPD - margin of financial strength in monetary terms.
Formula for financial safety margin in physical terms:
ZPn = (Rn -Tbn)/Rn * 100%, where
ZPn - margin of financial strength in physical terms.
The margin of safety changes quickly near the break-even point and more and more slowly as it moves away from it. A good idea of the nature of this change can be obtained by plotting the dependence of the safety margin on the sales volume.
OPERATING LEVER- a progressive increase in the amount of net profit with an increase in sales volume, due to the presence of fixed costs that do not change with an increase in the volume of production and sales of products.
Operating leverage- This quantification changes in profit depending on changes in sales volumes. The ratio of the contribution to cover fixed costs to the amount of profit is called operating leverage.
The concepts of markup and margin, which many have heard, are often denoted by one concept - profit. IN general outline, of course, they are similar, but still the difference between them is striking. In our article, we will understand these concepts in detail, so that these two concepts are not “combed with the same brush,” and we will also figure out how to correctly calculate the margin.
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What is the difference between markup and margin?
Margin is the ratio between the price of a product on the market to the profit from its sale, the main income of the company after all expenses measured in percentage. Due to the calculation features, the margin cannot be equal to 100%.
Extra charge- this is the amount of the difference between the product and its selling price at which it is sold to the buyer. The markup is aimed at covering the costs incurred by the seller or manufacturer in connection with the production, storage, sale and delivery of goods. The size of the markup is formed by the market, but is regulated by administrative methods.
For example, a product that was purchased for 100 rubles is sold for 150 rubles, in this case:
- (150-100)/150=0.33, as a percentage 33.3% – margin;
- (150-100)/100=0.5, as a percentage 50% – markup;
From these examples it follows that a markup is just an addition to the cost of a product, and a margin is the total income that the company will receive after deducting all mandatory payments.
Differences between margin and markup:
- Maximum permissible volume– the margin cannot be equal to 100%, but the markup can.
- Essence. Margin reflects income after deduction necessary expenses, and the markup is an increase to the cost of the product.
- Calculation. The margin is calculated based on the organization’s income, and the markup is calculated based on the cost of the product.
- Ratio. If the markup is higher, then the margin will be higher, but the second indicator will always be lower.
Calculation
Margin is calculated using the following formula:
OTs – SS = PE (margin);
Explanation of indicators used when calculating margin:
- PE– margin (profit per unit of goods);
- OC
- JV– cost of goods;
Formula for calculating margin or percentage of profitability:
- TO– profitability ratio as a percentage;
- P. – income received per unit of goods;
- OC– the cost of the product at which it is sold to the buyer;
IN modern economy and marketing, when it comes to margins, experts note the importance of taking into account the difference between the two indicators. These indicators are the profitability ratio from sales and profit per unit of goods.
Speaking about margin, economists and marketers note the importance of the difference between profit per unit of goods and the overall profitability ratio for sales. Margin is an important indicator, as it is a key factor in pricing, the profitability of marketing spend, as well as analyzing client profitability and forecasting overall profitability.
How to use a formula in Excel?
First you need to create a document in Exc format.
An example of a calculation would be the price of a product at 110 rubles, while the cost of the product will be 80 rubles;
Markups are calculated using the formula:
N = (CP – SS)/SS*100
Gde:
- N– markup;
- CPU- Selling price;
- SS– cost of goods;
Margins are calculated using the formula:
M = (CP – SS)/CP*100;
- M– margin;
- CPU- Selling price;
- SS– cost;
Let's start creating formulas for calculations in the table.
Calculation of markup
Select a cell in the table and click on it.
We write the sign corresponding to the formula without a space or activate the cells using the following formula (follow according to the instructions):
- =(price – cost)/ cost * 100 (press ENTER);
At correct filling in the margin field the value should be 37.5.
Margin calculation
- =(price – cost)/ price * 100 (press ENTER);
If you fill out the formula correctly, you should get 27.27.
When receiving an unclear value, for example 27, 272727…. You need to select the required number of decimal places in the “cell format” option in the “number” function.
When making calculations, you must always choose the values: “financial, numerical or monetary”. If other values are selected in the cell format, the calculation will not be performed or will be calculated incorrectly.
Gross margin in Russia and Europe
The concept of gross margin in Russia refers to the profit earned by an organization from the sale of goods and the variable costs of its production, maintenance, sales and storage.
There is also a formula to calculate gross margin.
It looks like this:
VR – Zper = gross margin
- VR– the profit the organization receives from the sale of goods;
- Zper. – costs of production, maintenance, storage, sales and delivery of goods;
This indicator is the main state of the enterprise at the time of calculation. The amount invested by the organization in production, on the so-called variable costs, shows marginal gross income.
Gross margin, or margin in other words, in Europe, is a percentage of the total income of an enterprise from the sale of goods after paying all necessary expenses. Gross margin calculations in Europe are calculated as percentages.
Differences between exchange and margin in trading
To begin with, let’s say that such a concept as margin exists in different areas, such as trading and the stock exchange:
- Margin in trading– a fairly common concept due to trading activities.
- Exchange margin– a specific concept used exclusively on exchanges.
For many, these two concepts are completely identical.
But this is not so, due to significant differences, such as:
- the relationship between the price of a product on the market and profit - margin;
- the ratio of the initial cost of goods and profit - markup;
The difference between the concepts of the price of a product and its cost, which is calculated by the formula: (price of the product - cost) / price of the product x 100% = margin - this is exactly what is widely used in economics.
When calculating using this formula, absolutely any currencies can be used.
Use of settlements in exchange activities
When selling futures on an exchange, the concept of exchange margin is often used. Margin on exchanges is the difference in changes in quotes. After opening a position, margin calculation begins.
To make it clearer, let's look at one example:
The cost of the futures that you purchased is 110,000 points on the RTS index. Literally five minutes later the cost increased to 110,100 points.
The total size of the variation margin was 110000-110100=100 points. If in rubles, your profit is 67 rubles. With an open position at the end of the session, the trading margin will move into the accumulated income. The next day everything will repeat again according to the same pattern.
So, to summarize, there are differences between these concepts. For a person without economic education and work in this direction, these concepts will be identical. And yet, now we know that this is not so.