The rule for calculating the profit margin: examples. Margin in marketing - calculation methodology, formulas Margin profitability formula

Many companies are now implementing management accounting systems. One of its main indicators, which is used to assess the performance of a business, is the profit margin. In this article, in simple language and using a conditional example, we will tell you what the margin profit is, what it is for and how to determine it.

What is profit margin?

Profit margin (or profit margin) is the difference between sales proceeds and variable costs. Moreover, both of these indicators - revenue and costs - are taken for a specific volume of products.

You can also say that this is the income that remains with the business with the sale minus variable costs.

As can be seen from the figure, the marginal profit is less than revenue by the amount of variable costs, but more profit from sales by the amount of fixed costs.

For the correct calculation of the marginal profit, you need to understand which company costs are fixed costs and which are variable.

Entrepreneur Vasily Petkin decided to start a business for the production of entrance and interior doors. For him, variable costs will be, for example, the cost of materials, accessories, components, as well as the wages of workers.

These costs are directly proportional to the number of doors produced, and the more orders there are, the more these costs. But the cost of maintaining an office and a retail outlet does not depend on how many doors are sold, 10 or 1000 - these are fixed costs. Vasily will bear such costs, even if he does not have a single order.

Thus, fixed costs do not depend on the volume of production, and the variables change in proportion to the amount of products or services produced.

The profit margin is the part of the proceeds that remains with the enterprise to cover fixed costs and make a profit. Therefore, the profit margin is often referred to as the “contribution to cover”.

Profit margin and accounting are two different things. First, they are counted according to different formulas. Secondly, the accounting profit is determined for the enterprise as a whole for a period of time, and the marginal profit is determined only in terms of a specific volume of products (works, services) produced and sold.

How the profit margin is calculated: the formula

The value of the indicator studied by us is expressed in absolute and relative values.

and per unit:

In these formulas, revenue and price are taken without VAT and excise taxes. Unit variable costs are variable costs per unit of output.

Vasily Petkin's enterprise produced and sold 15 doors at a price of $ 10. (excluding VAT) each. Variable costs amounted to 6 c.u. per door. The calculation of the margin profit will look like this:

Cumulative Margin Profit:
15 * 10 - 15 * 6 = 60 USD

Margin profit per unit of production:
10 - 6 = 4 c.u.

What is the profit margin for?

First of all, it is needed to calculate the break-even point. This is such a volume of production at which the company covers all its costs, but still does not make a profit:

At the break-even point, revenue is equal to the sum of variable and fixed costs, and profit is zero.

The fixed costs of Vasily Petkin in our example are 400 USD. To find out if it is enough for Vasily to sell 15 doors to reach a break-even level, we calculate the break-even point:

Break-even point (in units):
400/4 = 100 doors

Break-even point (in monetary terms):
(150 * 400) / 60 = 1,000 USD

Thus, Vasily's enterprise is beyond the threshold of profitability, and the proceeds still do not cover all costs. To break even, he needs to sell another 90 doors. After that, every next door will be profitable.

Such calculations are especially important at the stage of a company's entry into the market, as well as for planning income and expenses.

When a company has several types of products, it is incorrect to compare the absolute amounts of the marginal profit, since prices and sales volumes are different.

In this case, the profit margin ratio is used. It shows how profit margin relates to sales volume.

Formula and example of calculating the margin profit ratio

The formula looks like this:

The coefficient can be calculated both in shares, as in the above formula, and in percent. To do this, the resulting value is multiplied by 100.

Calculation of the margin ratio for entrepreneur Vasily Petkin:
4/10 = 0.4, or 40%

The profit margin ratio is also called the profit margin, or margin profitability. It allows you to compare profit margins across different products for assortment management.

Vasily Petkin produces 2 types of doors - entrance and interior doors.

Let's conduct a margin analysis using the above formulas:

As you can see from the table, the largest amount of profit margin is at the front door. It can be assumed that it is more profitable for Vasily to produce them than interroom ones. But the margin ratio at the front door is half that of the interior doors - 20% versus 40%. It turns out that, despite the lower revenue and marginal income, interior doors are more cost-effective. They bring a higher return in relation to the volume of sales than interroom ones.

How to interpret the profit margin indicator

The efficiency of an enterprise depends on how much the marginal profit is able to cover fixed costs:

• “Minus” profit margin means that the company has not yet reached the break-even level and has not even covered its variable costs. If the specific marginal profit is negative, then gross errors in pricing were made, because the price is lower than the cost price and does not even cover the unit variable costs. But a positive margin income does not mean that the business is profitable, because it may not be enough to cover fixed costs;
• if the company has reached the threshold of profitability, then the marginal profit is equal to constant expenses;
• when the business is efficient, there is enough margin income to cover fixed costs and taxes on income, and what remains is the company's bottom line.

You can clearly trace the relationship between sales volumes, marginal income and profit using the example of interior doors by Vasily Petkin (the initial data are the same):

As you can see from the table, the profit margin becomes positive already when 20 doors are sold. But production will not be profitable until it breaks even (highlighted in blue). With sales of less than 100 doors, the sales profit is negative, which means a loss. Vasily's business will bring more profit if he sells 101 or more doors. And profitability will grow with the growth of sales.

This is the result of the "operating leverage effect". Its meaning is that any change in the volume of sales leads to an even greater change in the financial result, which can also be seen from the table.

Margin profit rates and ways to increase it

There is no standard for the profit margin. Its level varies greatly depending on the industry and product category. Unlike luxury goods, goods and services with legal price caps will always have low margins.

How you can increase your profit margin:

• Increase revenue. Ideally, one should strive to increase the price category of a product by building trust in the brand, increasing its prestige and quality of service. But constantly raising prices is unrealistic, so you can go along the path of increasing production volumes. This will give a decrease in total costs and an increase in the share of profit in the structure of marginal income.
• Reduce variable costs: to look for the most favorable conditions for the purchase of raw materials, materials (dealer discounts or on the volume of purchases, import substitution, etc.), as well as to attract cheaper labor.
• Review the assortment: to increase the share of goods with the highest marginality in the total sales volume. In our example, at the enterprise of Vasily Petkin, interior doors are a high-margin product, therefore, in order to increase the total marginal profit, he needs to increase the production of this particular category of product.

Thus, the above analysis based on "management" can significantly improve business efficiency.

Within the framework of comprehensive accounting services 1C-WiseAdvice provides data preparation services for management accounting and reporting. Such reporting is tailored to the specifics of your business. If you need to make customizations from scratch, we have ready-made report templates. We will help you develop requirements for the implementation of management accounting and introduce you to our best practices.

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Russian microeconomics is being replenished with indicators that reflect the financial result of the organization's functioning. Such indicators are necessary in unstable market conditions, because allow you to form a more flexible strategy and consider efficiency from different angles. One of the significant indicators in this group is the profit margin.

Margin profit is what the indicator is and what it characterizes

The indicator reflects the financial result at the end of the period. The profit margin is used to calculate the effect of production without taking into account fixed costs.

It characterizes the income of the enterprise after passing the break-even point. It is advisable to calculate the indicator if fixed costs are covered by economies of scale.

The profit margin depends only on the core business and does not fit into the Russian forms of financial statements.

Formula and example of calculating the margin profit

The profit margin is calculated according to the information from the statement of financial results. The indicator is found as the difference between income and part of expenses. In other words, profit margin is the difference between revenue and average variable costs.

General calculation formula

In general terms, the net profit can be found using the following formula:

MP = TR - VC, where

MP (marginal profit) - marginal profit, rubles;

TR (total revenue) - revenue, rubles;

VC (variable cost) - variable costs for the total volume, rubles.

The above formula allows you to find the profit for the entire volume. Sometimes it is necessary to know the margin per unit of production, and in this case, use this formula:

MP units = P - AVC, where

MP units (marginal profit) - marginal profit per unit, rubles;

P (price) - unit price (revenue from one piece), rubles;

AVC (average variabl ecost) - average variable costs, rubles.

Balance calculation formula

Russian accounting does not allow to allocate variable costs for the volume of production, therefore, for the purpose of calculation, the technological cost is taken as variable costs. This cost indicator almost always consists of variable costs.

As a result of this amendment, the calculation formula is transformed:

MP = p. 2110 - p. 2120, where

p. 2110 - revenue, rubles;

p. 2120 - technological cost, rubles.

Calculation example

Enterprise LLC "Ekran" is engaged in the production of drills for milling machines. The financial statements for the last 2 years contain the following data:

Then, as a result of the calculation, the margin profit is:

MP 2013 = TR - VC = 115,000 - 50,000 = 65,000 rubles

MP 2014 = TR - VC = 175,000 - 70,000 = 105,000 rubles

The importance of this indicator

The indicator is significant for calculating indicators when planning production volumes. This is especially true for new activities or large investment projects.

Video - lecture "Profit margin, break-even point and operating leverage":

Without a marginal profit, it is impossible to calculate the break-even volume of production and sales in monetary terms.

The breakeven point is the volume of sales at which income covers losses and profit from sales is zero. More details about this indicator can be found in the article "What is a break-even point and how to calculate it." At the break-even point, the profit margin will be equal to constant expenses.

Operating leverage reflects the ratio of profit margin to revenue. In other words, the indicator expresses the share of the profit margin in total income. Operating leverage is also called the threshold of profitability.

The profit margin allows you to more effectively manage costs, since it takes into account only the total variable costs. The indicator is used in the production of several types of products for a rational assessment of the effect of each type of product.

Video - presentation on the topic of profit margin:

Before talking about the analysis of marginal income, let's define the very concept of "marginal income".

Marginal income(marginal income) - income from sales of manufactured products, calculated as the difference between sales proceeds (value of products sold) and variable costs.

In fact, the marginal income (profit) contains two components - the company's fixed costs and its profit. The logic of this interpretation of the margin is based on the fact that the larger its amount, the greater the likelihood of compensation for the company's fixed costs and profit from business activities.

The marginal income received as a whole for the enterprise is calculated using the following formula:

MD = CHV - PZ

Where, NP - net proceeds (excluding VAT and excise taxes); ПЗ - variable costs; MD - margin income.

More informative is the definition of marginal income not for the entire volume of production, but for each nomenclature unit of production:

MD = (CHV - PZ) / Op = p - b

Where, Ор - sales volume in physical terms; p is the price of a unit of production (goods, services); b - variable costs per unit of output.

The essence of the marginal analysis lies in the analysis of the ratio of sales volume (output), cost price and profit based on predicting the level of these values ​​under given constraints.

In fact, analysis of marginal income this is the definition of the volume of production, which provides, at a minimum, the coverage of the sum of variable costs, that is, each subsequent unit of the product should not increase the overall loss of the organization.

There are a number of assumptions made when conducting margin analysis, which are bottlenecks that distort the results obtained. In general, these assumptions can be attributed to the disadvantages of the method:

1. Linear relationship between income and costs... When prices remain unchanged, the change in profit does not occur strictly in proportion to the increase in sales due to the fact that all total costs are divided into variable and constant components, the operating lever exerts its effect. When a certain point is reached, the profit increases and decreases faster than the sales level rises or falls. Practice shows that the total fixed costs remain unchanged if the volume of production increases or decreases by no more than 20%.

2. Variable and fixed costs... If we consider fixed and variable costs in terms of their relation to unit costs, then they have opposite meanings - in terms of unit costs, variable costs become fixed and vice versa. In relation to the volume of production, variable costs will remain unchanged, and fixed costs depend on the volume of production. The change in the volume of fixed costs per unit of production plays the role of "operating leverage" for profit values ​​with varying volumes of sales.

The operating leverage, calculated for a given volume of sales and used to quickly determine the amount of profit obtained depending on changes in the volume of sales, is higher in those enterprises where the ratio of fixed costs to variable costs is higher, and, accordingly, lower in the opposite case. The value of the operating leverage allows, by multiplying by the percentage of the change in sales volume, to determine the percentage of the change in the volume of profit.

3. The invariability of influencing factors- the scale of production, technology, labor productivity, the current rates and tariffs of wages, the selling price of the products and, in case of multi-product release, the ratio in the package (sales structure). The only variable is the volume of output (sales).

4. Equality of production and sales, which means that all released products are sold.

Margin profit

Definition

Margin profit ( English Contribution Margin) is one of the concepts of management accounting and is used in the analysis of "cost-volume of products-profit" to determine the profitability of a certain type of product or service. This indicator can be calculated per unit of production, for all products, as a coefficient and as a percentage.

This concept is useful in making various management decisions.

1. To answer the question whether an additional batch of products should be sold at a lower price.
2. To assess profitability at different levels of business activity.
3. To select the types of products with the greatest profitability. For example, if a business has the potential to produce several types of products, but has insufficient resources to produce all types, preference should be given to the types of products with the highest marginal profit.

Formula

Margin profit per unit of production

The value of this indicator per unit of production is calculated using the following formula.

where P per Unit is the unit price, VC per Unit is the variable costs per unit of output.

Cumulative Margin Profit

Represents the difference between revenue and total variable costs.

where S is the proceeds from the sale of products, TCV is the total variable costs.

Margin profit ratio

The coefficient value can be calculated in two ways.

The above formulas can be transformed as follows.

The coefficient value can also be presented as a percentage. For example, a coefficient of 0.2 corresponds to 20%.

Schedule

The relationship between the value of the total marginal profit and the volume of product sales is shown in the graph below.

Since revenue from sales of products and the value of total variable costs are changed in direct proportion to the level of business activity, the value of the total marginal profit increases in proportion to the growth in sales.

In contrast, profit margins per unit of output remain unchanged at any level of business activity, provided that the unit price and variable costs per unit of output remain unchanged. The behavior of this indicator is shown in the graph below.

It should be noted that the value of the margin profit in some circumstances can take negative values.

Management accounting lecture maierils content

This means that the proceeds from the sale of products do not even cover the incurred variable costs. If these circumstances persist, the company's management needs to consider a decision to stop production and sale of these types of products.

Calculation example

LLC "Retail Fashion LTD" is a retail clothing store that sells four types of goods. Data on the selling price, variable costs and sales volume in the reporting quarter are presented in the table.

Let's analyze the profit margin based on the formulas presented above.

CM per Unit Jeans = 85 - 50 = 35 USD

CM per Unit Pants = 50 - 25 = $ 25

CM per Unit Raglans = 45 - 30 = 15 USD

CM per Unit Sweaters = 90 - 60 = 30 USD

S Jeans = 85 × 2,500 = 212,500 c.u.

S Pants = 50 × 1,700 = 85,000 c.u.

S Raglans = 45 × 3 250 = 146 250 c.u.

S Sweaters = 90 × 1,300 = 117,000 USD

TVC Jeans = 50 × 2,500 = 125,000 USD

TVC Pants = 25 × 1,700 = $ 42,500

TVC Raglans = 30 × 3,250 = $ 97,500

TVC Sweaters = 60 × 1,300 = 78,000 USD

TCM Jeans = 212,500 - 125,000 = $ 87,500

TCM Pants = 85,000 - 42,500 = 42,500 USD

TCM Raglans = 146,250 - 97,500 = $ 48,750

TCM Sweaters = 117,000 - 78,000 = $ 39,000

CM Ratio Jeans = 87,500 ÷ 212,500 = 0.412 or 41.2%

CM Ratio Pants = 42,500 ÷ 85,000 = 0.500 or 50.0%

CM Ratio Raglans = 48 750 ÷ 146 250 = 0.333 or 33.3%

CM Ratio Sweaters = 39,000 ÷ 117,000 = 0.333 or 33.3%

The results of the analysis of the margin profit are aggregated in a table.

As you can see from the table, trousers are the most marginal product for Retail Fashion LTD, since they bring the maximum profit per $ 1. attachments.

Marginal income.

Term marginal income(MD), from the English. marginal revenue is used in two ways:

• Marginal income is the additional income received from the sale of an additional unit of goods.
• Income received from sales after reimbursement of variable costs. In this case, the marginal income is the source of the formation of profit and coverage of fixed costs.

This discrepancy is due to the ambiguity of the English word marginal:

• Ultimate, hence the words "marginal, marginal" - located on the border, at the limit of the generally accepted.
• Change, difference, hence the word "margin" - the difference in interest rates, etc.

Formula for calculating margin income (margin profit):

TRm = TR - TVC, where

TRm - Margin Income

TR - total revenue

TVC - Total variable cost

Thus, the profit margin is a fixed cost and profit. Often, instead of MD, the term “contribution to cover” is used: margin income is a contribution to cover fixed costs and generate net profit.

The formula for calculating marginal income does not show its dependence on fixed costs, variable costs and prices.

PROFIT PER PRODUCT UNIT

But in the examples of calculating the marginal income, it is clear that this dependence exists.

Marginal income is especially interesting if the company produces several types of products and it is necessary to compare which type of product gives a greater contribution to the total income. To do this, calculate what part of the MD in the share of revenue (income) for each type of product or product.

Profit margin and break-even point

The profit margin is equal to the fixed costs at the breakeven point. In other words, if the volume of sales is such that the company covers all its costs without making a profit, the marginal income only covers fixed costs.

In the picture below, there is a break-even point of 20 units of the sale of a certain product.

With this volume of sales, the profit line crosses 0 and goes into the positive zone, the income line crosses the cost line and goes above the cost line, and the profit margin line crosses the fixed cost line.

Look at Excel spreadsheet
"Break-even point and break-even analysis
with a large assortment "
Profitability, Minimum margin, Margin profit, Safety factor
Calculation and graphs

Margin is identified as a key factor in pricing, marketing ROI, margin forecasting, and customer profitability analysis.

Definition and Economic Meaning: Margin (return on sales) Is the difference between the selling price and the cost price. This difference is usually expressed either as a percentage of the selling price or as a profit per unit of production. Margin calculation (formula):

Profit per unit of production ($) = Sales price per unit ($) - Cost of unit of production ($)

Profitability Ratio (%) = Profit Per Unit ($) / Selling Unit Price ($)

Target: determining the magnitude of the increase in sales and managing pricing and decision-making for product promotion.

The profit margin is a key factor among many other basic business calculations, including estimates and projections. All managers need to know (and usually do) know their company's approximate return on sales and what it is showing. However, managers differ greatly in the assumptions they use when calculating ROI and in the way they analyze and find out what the margin is.

Profitability ratio and profit per unit of production

When talking about margins, it is important to keep in mind the difference between the profit margin and the profit per unit sold. This difference is easy to reconcile, and managers must be able to switch from one to the other.

What unit of production? Each company has its own idea of ​​what a unit is, which can range from a ton of margarine to 1 liter of cola or a bucket of plaster. Many industries deal with multiple items and calculate sales margins accordingly. In the tobacco industry, for example, cigarettes are sold in pieces, packs, blocks and boxes (which hold 1200 cigarettes). In banks, margin is calculated based on accounts, customers, loans, transactions, family units and bank branches. You need to be ready to easily switch from one concept to another, since decisions can be based on any of them.

Profitability ratio can also be calculated using monetary gross sales and total costs.

Profitability Ratio (%) = [Total Monetary Sales ($) - Total Costs] / Total Monetary Sales ($)

When calculating both a percentage (profit margin) and profit per unit of return on sales, you can perform a simple reconciliation by checking if the individual parts add up to the total.

To reconcile profit per unit of production ($):

Unit selling price = Profit per unit + unit cost.

To check the profitability ratio ($):

Costs as a percentage of sales = 100% - profitability ratio.

Example. One company sells fabrics in linear meters. Its baseline costs and selling price are as follows:

Unit selling price = $ 24 per linear meter.

Unit cost = USD 18 per linear meter.

Profitability ratio(%) = ($ 24-$ 18) / $ 24 = $ 6 / $ 24 = 25%

Let's check the correctness of our calculations:

Unit selling price = Profit per unit + Cost per unit.
$ 24 per meter = $ 6 per meter + $ 18 per meter.

Similarly, you can check the calculations of the profitability ratio:

100% - Sales Profitability Ratio (%) = Costs as a percentage of sales.
100% - 25% = $ 18 / $ 24
75% = 75%

Trading margin: data sources, difficulties and warnings

After you define the units of measurement, you will need two types of raw data: unit cost and unit selling prices.

Sale prices can be determined before or after the various stages of pricing. Deductions, consumer discounts, reseller payments, and commissions can be shown to management as either expenses or deductions from the selling price. Moreover, external reporting may differ from reporting to management, as accounting standards may require different processing of data from internally accepted practices. The announced profitability ratios can vary quite a bit depending on the calculation methods used. This can lead to significant organizational confusion on such a paramount issue as how to determine the actual price of a product.

Care should be taken when calculating certain discounts and surcharges when calculating the net price. There is often a great deal of freedom to choose whether to subtract certain items from the list price to calculate the net price, or add them to costs. One example is the practice of providing gift certificates in retail for those customers who have purchased a certain amount of goods. They are not easily accounted for in a way that avoids confusion over prices, marketing costs, and profitability. In this regard, two important points should be noted:

1. Certain items can be considered either as deductions from prices, or as a premium to the cost, but only one thing.
2. Processing such items will not affect profit per unit of production, but will affect profit margins.

Margin as a share of the cost. In some industries, such as retail, margins are calculated as a percentage of costs rather than selling prices. Using this technique in the previous example, the profitability ratio (amount or amount of coverage) per meter of regular fabric could be calculated as profit per unit of production ($ 6) divided by the cost per unit of production ($ 18), and it would therefore be 33%.

Surcharge or Margin?

Although some people characterize the terms "margin" and "premium" interchangeably, this is not true. The term “mark-up” usually refers to the practice of adding a certain percentage to the cost price to calculate the selling prices.

To better understand the relationship between margin and markup, let's do some math. For example, a 50% markup on variable costs of $ 10 would be $ 5, resulting in a retail price of $ 15. Conversely, the margin on a position that sells at the retail price of $ 15 and incurs variable costs of $ 10 would be $ 5 / $ 15, or 33.3%. Table 1 shows some of the relationships between the amount of margin and markups. A graphical representation will help clarify the situation, so do not forget to build a graph when calculating.

Table 1. Relationship between margin values ​​and markups

One of the specific features of retail is that prices rise as a percentage of the store's purchase prices (variable cost per item), but decrease during sales as a percentage of the retail price.

Most managers understand that a 50% sale means retail prices are down 50%.

Example. A clothing retailer buys T-shirts for $ 10 and sells them at a 50 percent mark-up. A 50% variable cost markup of $ 10 results in a retail price of $ 15. Unfortunately, the item is not for sale and the store owner wants to sell it at cost to free up shelf space. He inadvertently tells sellers to sell the product at a 50 percent discount. However, this 50% price cut reduces the retail price by $ 7.50. Thus, a 50 percent mark-up followed by a 50 percent markdown results in a loss of $ 2.50 on every item sold.

One can easily see how the confusion occurs. It is usually preferred to use the term "margin" in relation to the ratio of profitability of sales. However, we encourage all managers to agree with their peers on what they mean by this important term. Also, the manager must know what is gross margin (and its formula) and what it is, what is net margin, futures margin, intermediate, specific. Allocating costs by calculating gross margin becomes much easier.