Marginal analysis is a method of evaluating and justifying the effectiveness of management decisions in business. It is based on the study of the causal relationship between sales, costs, and profit and the division of costs into fixed and variable (Ahuja, 2017). Its essence is that people want to maximize net income in any situation, that is, the difference between gross income and costs. To achieve this, they can change some critical parameters of their activity. Margin income is also called the coverage amount, that is, the part of the revenue that covers fixed costs and generates profit (Dodge, 2020). The greater the margin income, the faster fixed costs will be covered, and the faster the enterprise will begin to make a profit.
This concept is vital in the decision-making process for several reasons. Firstly, marginal analysis (break-even analysis) allows for studying the dependence of profit on a small range of the most critical factors. Based on this, the analysis controls the process of forming its value. What is more, the analysis helps to make other management decisions, for instance, the choice of options for changing production capacities, types of work and services, the product range, and the price of a new product. It also establishes the equipment options, production technology, and purchase of components. The analysis should answer several important questions concerning the sources and amounts of funds available to the company, as well as for what purposes and needs they are spent. In general, the marginal analysis of the enterprise helps the company’s management reliably assess the current situation and prospects (Dodge, 2020). The analysis evaluates the efficiency of using monetary resources and capital.
References
Ahuja, A. (2017). Managerial economics (Analysis of managerial decision making) (9th ed.). S Chand.
Dodge, E. R. (2020). 5 steps to a 5: AP microeconomics. McGraw-Hill Education.