Marginal revenue and its importance in making managerial decisions

Limit values can seem something purely theoretical and not relevant to the actual conduct of business at the enterprise only because of the lack of practice of working with them in the Soviet and perestroika period. In fact, the limit values are the most effective way to track the potential for a potential increase in profits, to which all enterprises aspire without exception. As for their logic and calculation, it is nothing more complicated than elementary algebra.

Marginal revenue is the additional revenue that a company receives from the sale of an additional unit of goods. It is one of the main limits that have a direct relationship with profit and price - the two most important indicators of the company's activities. Marginal revenue is a value that has a different value depending on the sales volume of the company. Thus, in order to carry out analysis using marginal revenue, it is necessary to create a table reflecting the change in this value when sales volumes change.

To be clearer, we will give the definition of marginal revenue. The marginal revenue is the change in the company's total revenue, as a result of growth in sales volumes per one conventional unit. For example, your company sold 20 units of 10 rubles each. Then , sales volumes increased by one, but the price remained the same. In this case, the marginal revenue will be equal to 20 rubles.

It may seem that at a fixed 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 we know, with the growth in sales volumes, the enterprise is forced to reduce the price to attract those customers who at a given price will not buy the goods. It turns out that you are benefiting from the increase in volumes, but you lose from the fact that all goods are slightly cheaper. In order to determine what is outweighed - a win or loss - and the marginal revenue is used, also known as marginal revenue.

Let's give an example: as a result of growth of sales volumes from twenty units to twenty one units of production, the price of one unit decreased to 9 rubles and 50 kopecks. In this case, our new aggregate income will be equal to 199.5 rubles, which is 50 kopecks less than the income at old volumes. It turns out that the marginal revenue is -50 kopecks. As it turned out, it is not profitable to increase sales volumes for the enterprise.

This example showed how limit values are used in management. If the marginal revenue falls below zero, then the company needs to stop the extensive growth and restrain production growth in order to keep prices at an acceptable level. Until the marginal revenue remains positive, there is a prospect for escalating volumes.

However, this analysis is somewhat incomplete. If the marginal revenue is positive, we also need to analyze the marginal costs of the enterprise. The marginal cost shows how much the costs have changed, as a result of the growth in sales volumes. According to elementary logic, this quantity will be positive, since each new unit of production requires the costs for 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 capacity is fully loaded.

In any case, if the marginal revenue is greater than the marginal cost, then we get marginal profit, which means that we need to increase sales. As a rule, this happens until new equipment is needed for production or active sales will not lower prices in the market.