The calculation of profit margins is an important part of operational analysis, especially in enterprises that produce several products. To assess which of them brings the maximum income, it is necessary to determine the marginal profit for each.
Instructions
Step 1
Marginal profit is the sum of the company's net profit and the amount of coverage of fixed production costs. Fixed costs do not depend on the volume of production, but are directly dependent on time. These include, for example, rent and security of premises, tax payments, etc. Thus, the calculation formula looks like this: MP = CP - Zper, where MP - marginal profit, CP - net profit, Zper - variable costs.
Step 2
The larger the volume of production, the smaller the share of fixed costs per unit, and vice versa. This, in turn, affects the cost, decreasing or increasing it. The physical volume at which the cost of a unit of goods is such that the proceeds from sales barely cover the costs is called the break-even point.
Step 3
This clearly does not follow from the formula, however, the value of the marginal profit is directly dependent on the price, or rather, on the difference in the purchase price of raw materials and the sale of the finished product. Thus, there are two ways to increase the potential profit: buy cheaper materials, expand production, or increase the margin. Any entrepreneur will find these two methods attractive, but doing it in a real market is not easy.
Step 4
First, there is price competition in the market, which dictates the marginal price in a particular niche, above which the price cannot be raised. In addition, the state sets certain limits, especially when it comes to basic necessities. Secondly, due to cheaper materials, the quality of products will also fall, which means that sooner or later demand will decrease, then the volume of sales will not correspond to forecasts.
Step 5
In this case, there can be two ways out: to change the product to another (for narrowly focused enterprises) or to calculate which of several items is best sold and to concentrate all production forces on it.
Step 6
Calculate the share of the profit margin for each product. See which one contributes more to the firm's income. Based on the received data, form a priority group of goods.
