Marginal Analysis in Accounting – Free Essay Examples

Marginal Analysis in Accounting

Marginal Revenue

Marginal revenue can be defined as the transformation in total revenue arising from selling an extra unit. Marginal revenue can also be taken to be comparable to the price of the output (Lehman & Png, 2007, p.92).

Khanna, OP and Jain, TR, (2010) on the other hand defined marginal revenue as the transformation in total revenue which results from the sale of one more or less unit output. It can be calculated as the in-between transformation in overall revenue by the alteration in amount of goods sold or out of total revenue. (Khana & Jain, 2010, p.9).

For each possible price of its output, a business should produce at the rate that balances its marginal cost with the price provided that the price covers the average variable cost. By varying the price, we can outline the quantity to be supplied at each probable price and, hence, construct the sales curve. The individual supply curve is indistinguishable with the portion of the sellers MC curve that is greater than the standard VC curve.

The link connecting TR and MR

An important element of economic analysis is to study the arrangement of a market and the behaviour of firms within it. To do this requires an understanding of revenues, costs, and profits. The total revenue (TR) of a firm measures the value of its sales. For example, if a car dealership sells ten cars at $20, 00 each, then its total revenue is $20,000. The total revenue of a business equals the price of the products multiplied by the number sold. Below is an illustration of the same:

Total Revenue = Price of a unit x Quantity sold,

TR = P x Q

The total revenue may not be the same as the cash received at that exacting moment because a sale may be on credit, but it represents what the sale is essentially worth. The cash may be paid later and controlling cash flow effectively is an important business activity. Whereas Marginal revenue is the difference in the total revenue when an additional unit is sold:

Marginal Revenue = Change in total revenue.

Change in the number of units sold

If a firm faces a downward-sloping demand curve, then to sell another unit it may have to reduce the price not only on the last unit, but on all of the ones before.

Define marginal cost

MC is defined as the amendment or difference in total cost that developed from an output transformation. In short it means the change in total cost resulting from a one unit change in output; the change in total cost divided by the change in output

MC = TC

The relationship between Marginal cost and total cost

There is a link between these two since the adjustment in total cost resulting from one-unit amendment in production is equivalents to the MC. With each successive unit of output, total cost increases by the marginal cost of that unit.

Define profit

Bragg Steven M. defined profit as the total of an entity, revenue and expenses, not including any components of other comprehensive income.

The concept of profit maximization

Given downward-sloping demand and marginal revenue curves and positive marginal costs, the profit maximizing price output combination is always at a higher price and lower production level than the revenue-maximizing price output combination. To be constant with long-run profit maximization, it is important to achieve some essential benefits, as well as improved product understanding among end users, increased consumer reliability, possible economies level in selling and advertising.

For a profit-maximizing firm determines its optimal level of output, using marginal revenue and marginal cost as criteria, at the level of output at which MR=MR, profits would be maximized or losses minimized; hence, the optimal output would occur at MR=MC. In some cases, there will be no level of output at which MR=MC. to determine the optimal output, in such cases, select the highest level of output at which MR >MC. If the firm produces one more part of output further than this level, then MC >MR, which would not lead to minimizing losses or maximizing profits.

The action of profit-maximizing firm when MR is > MC.

The firm will manufacture more goods pending the last items manufactured (maximum) cope. This means that the firm will have to make the most of the production and incomes. The contradictory is accurate if the marginal cost is > revenues.

Actions of profit-maximizing firm, when MR is < MC.

If, MR<MC, further manufacturing activity is at defeat. To maintain manufacturing in this concluding situation, the firm must embark on steps to cut cost such as dropping the cost of inputs, rising price manufactured goods preferably economically, progress on process competence, enhanced productivity.

Reference List

Bragg, S. M., (2010). Accounting Best Practices. Hoboken, New Jersey: John Wiley and Sons.

Khanna, O. P., & Jain,T. R. (2010). Business Economics. New Delhi: FK Publications.

Lehman, D., & Png, I. (2007). Managerial economics. Malden, MA: Wiley-Blackwell.

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