International Journal of Management and Economics Fundamental
36
https://theusajournals.com/index.php/ijmef
VOLUME
Vol.05 Issue 06 2025
PAGE NO.
36-39
10.37547/ijmef/Volume05Issue06-08
Marginal Profit Analysis
Abdujaborova Маmura Тoshmuxamadovna
Assistant professor of Tashkent State University of Economics, PhD, Uzbekistan
Ergashov Shohruh Rustam ugli
Student of Inha University in Tashkent, Uzbekistan
Received:
12 April 2025;
Accepted:
08 May 2025;
Published:
10 June 2025
Abstract:
This article explores the concept of marginal profit, its capabilities, and advantages. It also examines
various approaches of economists to marginal profit analysis as presented in scientific literature. As a result of the
research, the author proposes a methodology for organizing marginal profit analysis and performs calculations of
the relevant indicators. Additionally, suggestions are provided for increasing marginality.
Keywords:
Marginal analysis, margin, marginality, marginal profit, variable costs, fixed costs, operating leverage,
financial leverage, break-even point, financial safety margin.
Introduction:
The rapid development of the economy
requires company management to make timely and
well-informed managerial decisions. In particular,
enterprises independently plan their operational
activities, including the types and volumes of products
to be produced, costs, revenues, and profit margins. In
substantiating such managerial decisions, marginal
profit analysis plays a crucial role.
Through marginal analysis, it becomes possible to
determine what the company’s profit depends on, the
share of high-cost resources, the risks and prospects of
enterprise development, the reasons for potential
losses, and other critical factors.
Literature Review
Any decision made regarding price, costs, sales volume,
and product structure has a significant impact on a
company's financial performance. Marginal analysis is
considered a simple and precise method for identifying
the interrelation among these categories [Sarantseva,
2017].
In
today’s
market
conditions,
enterprises
independently plan their operations, including profit
targets, cost structures, and product assortments. In
the process of planning and making well-grounded
management decisions, marginal analysis
—
also known
as break-even analysis
—
plays a crucial role [Vorozhbit
et al., 2016].
Any decision made regarding the price, volume, or
assortment of products (works, services) directly
affects the company's financial outcomes
—
whether
profit or loss. Marginal profit analysis provides the
opportunity to examine the degree of interdependence
among these factors [Vorozhbit et al., 2016].
Marginal (operational) analysis is a powerful analytical
tool in the financial activities of business organizations,
as one of their most important objectives is to ensure
long-term sustainable operations and to increase
business value. Among the tactical goals of business
organizations is the maximization of profit [Musaev,
2020].
The break-even volume of production represents the
point at which revenue equals costs. By comparing the
actual production volume with the break-even point,
the company’s safety zone can be identified. If the
safety zone reflects a negative value, it may be
necessary to revise production conditions and
discontinue certain types of products [Abdujaborova,
2024].
Marginal analysis provides a foundation for managerial
decision-making: selecting options for modifying
production capacity, choosing equipment and
International Journal of Management and Economics Fundamental
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International Journal of Management and Economics Fundamental (ISSN: 2771-2257)
production technologies, purchasing components,
evaluating the profitability of accepting additional
orders, determining product assortment, setting prices
for new products, and more [Fomina et al., 2011].
METHODOLOGY
During the research, methods such as logical reasoning,
a systematic approach, analysis, the coefficient
method, vertical analysis, and factor analysis were
used.
RESULTS
Marginal profit and margin are simple indicators that
help answer the following questions:
•
Which product is profitable to produce?
•
Which product generates the highest profit?
•
Should the product assortment be reconsidered?
The basis of marginal profit analysis is the separation of
production costs into fixed and variable expenses.
However, dividing costs into fixed and variable parts is
considered a significant limitation and complexity of
marginal analysis. In particular, under conditions of
producing a wide assortment of products, identifying
variable costs in relation to individual product types
becomes challenging.
The main capabilities of marginal analysis are reflected
in substantiating management decisions in the
following areas:
•
Break-even production volume
•
Break-even sales volume
•
Critical level of fixed costs
•
Sales volume required to achieve the target profit
•
Production capacity
•
Production technology.
Through marginal profit analysis, management
decisions are made in the following areas:
•
Production volume
•
Pricing of products (works, services)
•
Product assortment
Margin is the difference between the revenue from the
sale of a product (or service) and the production costs,
and it is considered an absolute indicator.
𝑀 = 𝑁𝑅 − 𝑃𝐶
Here:
M
–
Margin;
NR
–
Net revenue;
PC
–
Production costs.
This indicator allows the business owner to make
management decisions regarding which direction to
continue operations, what changes to implement, and
what to discontinue. A high margin may be associated
with increased sales volume. However, total margin
may not provide complete information about the
profitability of a specific product. Therefore, it is
advisable to calculate the margin separately for each
product.
Marginality represents the ratio of margin to net
revenue.
𝑀𝑘 =
𝑀
𝑁𝑅
∗ 100%
Here:
Mk
–
Marginality (in percentage)
M
–
Margin
NR
–
Net revenue.
In some cases, an increase in margin over time may be
accompanied by a decrease in marginality. This can be
due to production costs rising faster than the net
revenue from product (or service) sales. The reasons
for this may include an increase in raw material and
supply prices, as well as inefficient use of resources.
Products are categorized by marginality as follows:
•
Low margin: These are essential goods with high
competition, so they typically have low margins.
Such products usually have a marginality of no
more than 30%.
•
Medium margin: This group includes goods for
secondary needs, such as kitchen appliances,
furniture, building materials, and electrical
equipment. Although competition is still strong,
their longer service life allows for relatively higher
margins, generally ranging from 30% to 50%.
•
High margin: This category includes non-daily-use
items like jewelry, evening dresses, and services
such as photography, hairdressing, and styling.
Products in this group have margins exceeding
50%, and in some cases, can even surpass 100%.
An increase in the marginality indicator reflects
efficient management of the enterprise’s operational
activities, characterized by either a reduction in costs
or a rapid growth in net revenue.
A decrease in this indicator indicates that the
enterprise needs to optimize costs or increase the value
of its products.
The marginal profit indicator is calculated by
subtracting variable costs from net revenue.
If this indicator is below zero, it means the enterprise
cannot cover the costs incurred to produce the
International Journal of Management and Economics Fundamental
38
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International Journal of Management and Economics Fundamental (ISSN: 2771-2257)
product. This, in turn, requires a detailed review of the
production process and product assortment.
𝐌𝐏 = 𝐍𝐑 − 𝐕𝐗
Here:
MP
–
Marginal Profit
NR
–
Net Revenue
VC
–
Variable Costs
The volume of marginal profit depends on the industry
and the nature of the enterprise's activities. The trade
of precious metals is considered the sector with the
highest marginal profit, while the trade of primary
consumer goods provides the lowest marginal profit.
Marginal profit can be increased through two
approaches: intensive and extensive. The intensive
approach focuses on increasing sales volume, whereas
the extensive approach involves raising the product
price.
The volume of marginal profit can also be increased by
reducing variable costs. This can be achieved by
identifying optimal methods and quantities for
purchasing raw materials and supplies, obtaining
discounts from suppliers, and modernizing the
production process.
During the implementation of marginal profit analysis,
the following indicators are used:
•
Operating leverage
•
Financial leverage
•
Break-even point
•
Financial stability reserve of the enterprise
Operating leverage (операцион дастак) measures how
a 1% change in net revenue affects the profit volume.
Changes in net revenue from sales significantly impact
profit changes. This, in turn, depends on variable and
fixed costs and their fluctuations. A high level of fixed
costs amplifies the effect of operating leverage.
𝑂𝐿 =
%
change
in
EBIT
%
change
in
net
revenue
Where:
OL
–
Operating Leverage
EBIT
–
Earnings Before Interest and Taxes (profit before
tax)
In enterprises with a relatively low amount of working
capital, a strong effect of operating leverage is risky.
Under conditions of economic instability, high inflation,
and a decline in demand from creditworthy buyers,
even a 1% decrease in net revenue can lead to a
reduction in the company’s profit and push it into the
loss zone.
Financial leverage (молиявий дастак) indicates the
ratio of borrowed funds to equity. The effect of
financial leverage influences the level of financial risk
for the enterprise. Since loan funds and their associated
interest expenses are considered fixed costs, an
increase in financial leverage amplifies the impact of
operating leverage and raises the overall business risk.
𝐹𝐿 =
𝐷𝐶
𝐸𝐶
Here:
FL
–
Financial Leverage
DC
–
Debt Capital
EC
–
Equity Capital.
The break-even ratio expresses the ratio of fixed costs
to the total margin.
BER =
FC
TM
Here:
BER
–
Break-even ratio;
FC
–
Fixed costs
TM
–
Total margin.
The gross margin ratio is determined by the ratio of the
gross margin to net revenue. The gross margin itself
consists of the difference between net revenue and
variable costs.
The financial stability reserve of the enterprise
indicates the difference between net revenue and the
break-even point.
We will calculate these indicators based on conditional
values in the table below:
Table 1
Calculation of Marginal Analysis Indicators
№
Indicators
Amount
1.
Net revenue, billion UZS
13 305
2.
Variable costs, billion UZS
4 750,2
3.
Marginal profit, billion UZS (Row 1 – Row 2)
8 554,8
4.
Fixed costs, billion UZS
2 035,8
International Journal of Management and Economics Fundamental
39
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International Journal of Management and Economics Fundamental (ISSN: 2771-2257)
5.
Profit, billion UZS
2 486
6.
Sales volume, quantity (thousand tons)
100
7.
Price per unit, thousand UZS
0,5
8.
Marginal profit margin (Row 3 / Row 1)
0,64
9.
Break-even ratio, billion UZS (Row 4 / Row 8), (tons)
3 180, 94 (6 tons)
10.
Financial stability reserve, % ((Row 1 – Row 9) / Row 1
* 100%)
76,1
11.
Operating leverage effectiveness (Row 3 / Row 5)
3,4
According to the table data, the enterprise reaches the
break-even point by producing 6 tons (3,180.94 billion
UZS) of products, covering all its costs.
The financial stability margin amounts to 76.1%. This
level means that the enterprise can sustain a decrease
in net revenue of up to 76.1% and still remain
profitable; if the decrease exceeds this level, the
enterprise will incur losses. Therefore, even with a
decline in net revenue (up to 76.1% in our enterprise's
case), the company can still achieve profitability.
The operating leverage ratio is 3.4. This means that a
1% decrease in net revenue will result in a 3.4%
decrease in profit.
CONCLUSION
Margin analysis in business aims to achieve several
important objectives:
•
Evaluating profitability. Margin allows assessing
the profitability of the company or individual
products. This helps to understand whether the
business is successful and to identify measures to
improve it. Margin calculation assists in pricing
products (or services) while considering costs.
•
Planning company growth and profitability
analysis. Determining the margin helps evaluate
and plan the company’s operational profitability.
By comparing the margin of each product (or
service), their contribution to profit is identified,
which forms the basis for assortment policy
decisions.
•
Making strategic decisions. Margin indicates which
products (or services) deserve more attention. It
also guides decisions on reducing costs or
increasing prices.
•
Financial planning and management. Margin helps
determine how many products need to be sold to
achieve a certain amount of profit.
To increase marginality, it is advisable to focus on the
following aspects:
•
Expanding the product assortment;
•
Regularly updating the product (service) catalog;
•
Striving to sell at the highest possible price;
•
Providing quality service to customers;
•
Aiming to increase the number of repeat
purchases;
•
Encouraging customer purchases;
•
Applying cross-selling and up-selling techniques;
•
Utilizing internet acquiring services;
•
Offering installment payment options.
REFERENCES
Abdujaborova M.T. (2024) Methodology for analyzing
the volume of product (work, service) production.
Green Economy and Development, No. 12, pp. 190-
195.
Vorozhbit E.G., Vyskrebentseva A.S., Laskina M.V.
(2016) Assortment and profit management based on
marginal analysis. Internet Journal Naukovedenie, No.
1 (32).
Musayev R.A., Rabadanova Zh.B. (2020) Marginal
analysis of enterprise profit and profitability. World
Science, No. 12 (45), pp. 229-231.
Sarantseva E.G. (2017) Justification of managerial
decisions based on marginal analysis. Bulletin of
Volzhsky University named after V.N. Tatishchev, No. 2.
Fomina I.A., Vorontsova A.M., Pirog A.I. (2011)
Operating leverage effect in the marginal analysis
system. Economics and Management, No. 3 (65), pp.
70-73.
