Marginal revenue, formula, and the marginal cost of production

Marginal revenue (MR) is the increase in revenue from selling one additional unit of output. It is the revenue a company can generate from selling each additional unit that includes the marginal costs. The marginal revenue formula calculates the change in revenue by change in quantity. So, the MR formula is,

Marginal Revenue (MR) = Change in Revenue (ΔTR) / Change in Quantity (ΔQ)

A company examines its MR for determining its earnings on selling the extra units of output. So, a business seeking to boost its profit margins must increase its productions to the level where MR is equal to marginal cost. However, experts advise enterprises to carry out a cost-benefit analysis and reduce output if the MR drops below marginal cost.

 How To Calculate Marginal Revenue?

 Calculating MR is pretty simple. Just that while calculating the MR with the formula, keep in mind that the calculation is broken into two parts:

• Change in revenue = Total Revenue – Old Revenue
• Change in quantity = Total Quantity – Old Quantity

Let’s look at an example.

Mr. Jackson used to sell ten apples per day, but now he sells 15. Previously, his total revenue was $20, which has increased to $28. Calculate his MR per additional unit sold.

Marginal Revenue (MR) = Change in Revenue (ΔTR) / Change in Quantity (ΔQ)

= 8/5

= $1.60

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What Is Marginal Revenue Product & How Does It Work?

Marginal Revenue Product (MRP) is an important concept that helps to determine the demand for production inputs and examine a resource's optimal quantity. MRP indicates the change in total revenue by adding a variable unit of production.

Business executives use this concept to conduct market research and carry out marginal production analysis. The additional revenue from a unit of input helps determine the maximum price a company is willing to pay for the additional unit.

Business analysts also use the method to carry out production decisions, estimate costs and revenues and gain a competitive advantage. By applying the concept of MRP, the management also evaluates the product demand and determines the number of resources they must employ for each unit. This means, if the MRP decreases, the company would be motivated to spend less on each additional unit's production.

Learn how companies use MRP analysis to optimise production from industry specialists. MyAssignmenthelp.com is the hub of top financiers, accountants, and economists with extensive subject and industry knowledge. With their expertise, you can gain an in-depth understanding of the context.

How To Find Marginal Revenue Product?

So, how to find a marginal revenue product? It’s simple! To calculate the MRP, use the math formula:

MRP = MPP x MR

Where:

MRP= Marginal Revenue Product

MPP= Marginal Physical Product

MR= Marginal Revenue

For example, let's say Mr. Lobo is the manager of a water bottle manufacturing company. He is looking to hire another employee to meet the increasing product demand. He sells each unit for $10 and assumes that the new employee with produce 200 extra water bottles every week. Calculate the MRP.

MRP = MPP x MR

= 200 x $10

= $2000

Therefore, if Lobo hires a new employee, s/he will generate additional revenue of $2000 every week for the company.

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Understanding Marginal Product Of Labour

Marginal Product of Labour (MPL) increases a company's total production when additional labour or employee is added, and other factors remain cost. In other words, the MPL is the extra output a company gets on hiring a new worker.

The MPL is usually positive during the early days of the new worker. Still, the return begins to fluctuate when the number of labours increases, as they share the resources and equipment for production. Eventually, hiring an additional worker will decrease production, which is known as the law of diminishing marginal returns.

The MPL is crucial because it's the primary variable in another calculation – the marginal revenue product of labor (or MRPL), which changes the total revenue when another worker is hired, and other factors remain constant.

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How To Calculate Marginal Product Of Labour?

The MPL is the incremental change in output production due to an additional worker. How to calculate marginal product of labour? The calculation is quite simple! You can determine the MPL by using the following formula.

MPL = change in output / change in labor

And the shorthand formula is,

MPL = ΔY / ΔL

Where,

• Δ TP is changed in the output
• Δ L is the change in labour

The formula depicts the additional output when an extra worker is hired.

It depicted the additional output when 1 unit of labor or another new employee was hired or added to the firm. Hence, divide the difference in additional production by the difference of extra labour to get the MPL.

Example:

Company A has three workers who produced 101 units every day. On hiring another worker, the production went up to 100. Calculate the MPL.

Solution:

• Existing total production: 101 units
• Existing total Labour: 3
• New total production: 110 units
• New total Labour: 4

So,

Change in output = 110 -101 = 9

Change in labour = 4-3 = 1

MPL = ΔY / ΔL

= 9/1

= 9

Therefore, the MPL of the product is 9.

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Average Product Of Labor Formula

Average Product (AP), also called Average Product of Labour (APL), is the total product (TP) divided by the total labour. It is the average number of output each employee can produce.

With the average product of labor formula, a company can measure how much each employee produces on average while keeping the other production factors constant. The higher the A, the more productive is a production factor.

However, the average revenue product (ARP) is different than APL. ARP equals the revenue earned per factor of production while keeping other factors constant.

The APL is calculated by:

APL = Total Product (TP)/ Labour (L)

 Example:

XYZ farm has three employees and produces 120 kg of sugar cane a month. What would be the APL?

APL = Total Product (TP)/ Labour (L)

                                                   = 120/ 3

                                                   = 40 kgs per worker

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