How to Calculate Marginal Revenue

Companies and businesses use financial measurements like marginal revenue to figure out how to optimize profits and balance costs. If you are in a leadership role, in accounting, or otherwise involved in looking at the business's bottom line, you may need to figure out how to use marginal revenue and associated concepts. Here are some of the most common recommendations from finance experts on how to calculate marginal revenue for a business.

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 Steps

    1
    Figure out the total revenue for the business. This is most commonly calculated within a specific time frame, usually within a fiscal year. However, when you're calculating the marginal revenue, you can use any time frame you like, as long as it is consistent.
    2
    Assess the value of selling 1 more unit. The marginal revenue is based on the theoretical production of 1 more unit above actual total revenue.
        In figuring out the value of selling an additional unit, look at whatever goods or services you are offering to customers. Mark down the price of one unit of sale. For example, in a company that sells widgets at $5 per piece, where the price never changes, the marginal revenue will be $5.
    3
    Consider whether the price of the product must change in order to sell an additional unit. Finance professionals point out that in using marginal revenue, there's usually not much of a question about the benefit of additional production unless the business or company knows that it must reduce the price in order to sell more. If your calculation includes a need to reset price, you will probably need to do some additional market research to see how far you must reduce prices to get more sales.
    4
    Evaluate the marginal cost of producing one more unit. Marginal cost is the other side of the coin for marginal revenue. When you're looking at marginal revenue in order to help with decision-making, you need to know whether the marginal revenue will exceed the marginal cost. If the marginal revenue is greater than the marginal cost, it is still profitable to produce and sell 1 more unit. If not, the business usually decides against additional production.
        Do appropriate research into marginal cost. Businesses don't always know what it really costs them to acquire or produce a product, or to offer a service. In fact, while marginal cost is quite easy for third-party drop shippers or others who simply acquire a physical product at a set price, it can be much tougher for businesses that offer services, where major cost drivers include labor, transportation and other more nebulous values. Do your best to get the most concrete numbers you can to figure out your marginal revenue and marginal cost analysis.