Also called marginal benefit, sometimes called marginal contribution
In economics, the marginal effect refers to economically achieving the maximum economic profit at the minimum cost, thereby achieving Pareto optimality. Refers to the utility of the last unit of goods or services compared to the previous unit. If the utility of the latter unit is greater than the utility of the previous unit, the marginal utility is increasing, otherwise, the marginal utility is diminishing.
In accounting, the marginal effect refers to the balance of sales revenue minus variable costs. The marginal contribution is a very important indicator for product production decisions using the principle of profit and loss analysis. Usually, the contribution margin is also called "marginal profit" or "contribution margin".
The application of marginal effects is very extensive. For example, the law of demand in economics is based on this, that is: the more a user buys or uses the quantity of goods, the lower the cost he is willing to pay for a unit of goods (because the goods purchased later on The utility is reduced). Of course, there are a few exceptions. For example, people who are addicted to alcohol will become happier as they drink, or philatelists collect a set of Cultural Revolution stamps. Then the last stamp collected in this set has the greatest marginal effect.
Contribution margin analysis is based on the habitual analysis of costs, and according to the relatively constant characteristics of fixed costs in the relevant range, this part of the cost is not considered in the decision analysis, but only the marginal contribution created by the product is analyzed. , By comparing the marginal contribution of each program to determine the optimal program analysis method.
1. Decision analysis for developing new products
What I described above is just to use the surplus production capacity of the enterprise to analyze and research which new product is more suitable. As for the decision to increase investment in fixed assets and expand production capacity to develop new products, it falls within the scope of long-term investment decisions.
2. Decision analysis on whether to accept additional orders
The decision-making in this area can use the difference analysis method or the marginal contribution analysis method. In principle, it can be accepted as long as the opposite customer’s offer is slightly higher than the unit variable cost and can compensate for the exclusive cost.
3. Decision analysis on whether the loss-making products should be discontinued or converted
In the daily operation of industrial enterprises, some products are often inferior in quality, outdated in styles, and other reasons, resulting in poor sales in the market, backlog of warehouses, and losses. This leads to the question of whether the loss-making products should be discontinued or converted. For this aspect of decision-making, the contribution margin analysis method can usually be used to solve it.
Take the example of daily life.
means that when you have more and more of one thing, the last one will become less valuable to you. For example, if you are hungry, the first bowl of noodles is very fragrant, the second bowl of noodles is very fragrant, the third bowl of noodles is okay, the fourth bowl of noodles is full, the fifth bowl of noodles cannot be eaten, and the sixth bowl of noodles is annoying. ! In other words, the effect of the sixth bowl of noodles is zero or even negative. Because of this marginal effect, material consumption has reached a certain level, and people will start to become bored with this consumption.
If you are a company management and you want to increase employees' wages, the effect of adding 1K to a 3K monthly salary is generally greater than a 6K monthly salary increase of 1K, or even a 2K increase to a 6K monthly salary, so It seems that increasing the monthly salary of low-income people is more beneficial to the company; it is even more obvious to the same person. For example, the incentive effect of increasing 1K when he gets 3K is generally far more than the increase of 2K when he gets 6K monthly salary. Great incentive effect. In addition, it is not enough to increase the salary of employees to maintain their work enthusiasm. After the first salary increase of 1K, the employees were very excited and greatly increased their enthusiasm; the second salary increase was 1K, which was very exciting and increased some work enthusiasm; The third salary increase by 2K is a bit excited and may increase the enthusiasm for work; the fourth time... until the salary increase has no effect, because according to Maslow’s demand theory, when the salary reaches a certain level At this time, his focus has shifted, so the incentive methods should change accordingly.
If you want to avoid this situation and want to achieve the same effect as the first salary increase of 1K each time, the second salary increase may require 2K, and the third salary increase may require 3K... After the salary has risen to a certain level, the form of red envelopes is more stimulating and guiding. Of course, other incentives can be used, such as the second time they can be arranged to participate in professional development training, and the third time they can be promoted in their positions. Although the cost may be appropriate, they have achieved better results due to different means.
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