Formula to Calculate Marginal Revenue

The marginal revenue formula is a financial ratio that calculates the change in overall revenue resulting from the sale of additional products or units.

Let us see an example and understand.

A chocolate seller prepares homemade chocolates and sells 30 packets per day, including the cost of chocolate raw material, preparation, packing, etc. The seller decides to sell the same for $10 for one packet of chocolate.

He made 35 packets by mistake and sold them at $10 each. That day he earned $350. Generally, he sells 30 packs and earns $300 from it. Today, he sold an additional five packets. Through this, he had marginal revenue of $30, i.e. ($10 * 5) that will be $50.

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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.

Example of Marginal Revenue (with Excel Template)

  • First, we need to calculate the change in revenue. A change in revenue is a difference in total revenue and revenue figure before the additional unit. Change in Total Revenue = Total Revenue – Revenue figure before the additional unit sold 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 other unit. Change in Quantity Sold = Total quantity sold – Quantity figure before the additional unitSo, a change in quantity is the total quantity sold subtracted by the 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.

Change in Total Revenue = Total Revenue – Revenue figure before the additional unit sold

Change in Quantity Sold = Total quantity sold – Quantity figure before the additional unitSo, a change in quantity is the total quantity sold subtracted by the 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.

Mary owns a bakery and prepares cakes. Mary wants to know how much to produce and sell the price of the cakes. She used a marginal revenue curve to find the same. Mary bakes 50 cakes per day and sells the same at $150. As a result, she generates $7,500 in revenue. After her analysis, she needs to price 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.

Uses and Relevance

It is a microeconomic term. Still, it also has many financial and managerial accounting applicationsManagerial Accounting ApplicationsThe primary function of managerial accounting is to analyzes and measure financial information using various tools, and then interpret it for financial managers to make decisions in order to achieve the organization’s goals.read more. Management uses marginal revenue to analyze the below points:

  • To analyze consumer demand or demand of the product in the market – Misjudging customer demand leads to a shortage of products and loss of sales and production, which leads to excess manufacturing cost.Setting price of the product – Setting the price is one way to influence the production schedule and change demand. If the price is high, demand will reduce. If the price is high, the company can profitProfitProfit refers to the earnings that an individual or business takes home after all the costs are paid. In economics, the term is associated with monetary gains. read more, but sales will reduce if competitors sell the same at a lower cost.Plan production schedules – Based on the demand of the product in a market plan for production schedules.

It greatly influences product price and production level based on industry. Practically, in an actual competition environment where a manufacturer produces a huge quantity and sells the product at market price Market PriceMarket price refers to the current price prevailing in the market at which goods, services, or assets are purchased or sold. The price point at which the supply of a commodity matches its demand in the market becomes its market price.read more, the marginal revenue is equal to the market price. If the manufacturer prices, more sales decrease as in a competitive environment, alternatives are available. Whereas production affects the selling price if the output is low from a particular industry and choices are not available.

Hence, less supply will increase demand and increase the willingness of a customer to pay a high price. As a result, the company keeps marginal revenue inside the constraint of the price elasticity curve but can adjust its output and cost to optimize its profitability.

This article is a guide to the Marginal Revenue Formula. We discussed the calculation of marginal revenue, examples, a calculator, and a downloadable template. Also, you can learn more about an Excel modeling from the following articles: –

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