Formula to Calculate Marginal Revenue
Marginal revenue formula is a financial ratio that calculates the change in overall resulting from a sale of additional products or units.
Let’s see an example and understand the same.
A chocolate seller prepares homemade chocolates and sell, he sells 30 packets per day. The total price of chocolate includes the cost of chocolate raw material, preparation cost, packing cost, etc. Seller decides to sell the same at a price of $10 for one packet of chocolate.
Now, one day my mistake he made 35 packets and sell them at $10 each. And that day he earns $350 and generally he sells, 30 packets and he earns $300 from it. Today, he sold an additional 5 packets through this he had marginal revenue of $30 i.e. ($10 * 5) that will be $50.
Calculation of Marginal Revenue (Step by Step)
The marginal revenue formula is calculated by dividing the change in total revenue by the change in quantity sold.
Step 1: First we need to calculate the change in revenue. To calculate a change in revenue is a difference in total revenue and revenue figure before the additional unit was sold.
Change in Total Revenue = Total Revenue – Revenue figure before the additional unit was sold
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Step 2: Then we will calculate the change in quantity. Change in Quantity is the total additional quantity. Marginal revenue is used to measure the changes in producing one additional unit.
Change in Quantity Sold = Total quantity sold – Quantity figure before the additional unit
So, change in quantity is the total quantity sold subtracted by normal quantity or quantity figure before the additional unit.
Also, note the relationship between marginal revenue (MR) with marginal cost (MC)
- If MR > MC then the company should increase output for more profits,
- if MR < MC then the company should decrease output for additional profit.
- Under perfect competition, if the company objective is maximizing profit then MR=MC.
Example of Marginal Revenue (with Excel Template)
Mary owns a bakery and prepares cakes. Mary wants to know how much to produce and selling the price of the same she used a marginal revenue curve to find the same. Mary bakes 50 cakes per day and sells the same at $150 and as a result, she generates $7500 of revenue. After her analysis, she finds that she needs to price of cakes from $150 to $149 she bakes 100 cakes. Now, let us see the calculation of marginal revenue with one extra unit of cake baked by Mary.
First, we calculate the change in revenue by multiplying the baked volume by a new price and then, subtracting the original revenue. And a change in quantity is one.
- Change in Total Revenue = (149 * 51) – (150 * 50)
- = 7599 – 7500 = 99
Marginal Revenue Calculation = Change in Total Revenue / Change in Quantity Sold
So the Result will be-
Marginal Revenue Calculator
You can use the following Marginal Revenue Calculator.
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Use and Relevance
This is a microeconomic term, but it also has many financial and managerial accounting applications. Management uses marginal revenue to analyze below points: –
- To analyze consumer demand or demand of the product in the market– Misjudging of customer demand leads to a shortage of products and loss of sales and production in excess leads to excess manufacturing cost.
- Setting Price of Product– Setting the price is one way to influence the production schedule and change the level of demand. If the price will be high demand will reduce whereas is the price is the high company can make more profit but if competitors are selling the same at a lower cost, sells will reduce.
- Plan production schedules– Based on the demand of the product in a market plan for production schedules.
It has a great influence on product price and production level based on industry. Practically, in actual competition environment where a manufacturer is producing in huge quantity and selling product at market price, the marginal revenue is equal to the market price. If the manufacturer price more sale will decrease as in competition environment alternatives are available. Whereas, if an output is low from a particular industry and alternative are not available then production affect the selling price.
Hence, less supply will increase demand and increase the willingness of a customer to pay a high price. The company keeps marginal revenue inside the constraint of the price elasticity curve but, they can adjust their output and price to optimize their profitability.
This has been a guide to Marginal Revenue Formula. Here we learn how to calculate marginal revenue along with some practical examples. Here we also provide you with a marginal revenue calculator with a downloadable excel template. You can learn more about excel modeling from the following articles –