Marginal Revenue Formula

Marginal Revenue Formula (Table of Contents) [formula…..]

Marginal Revenue Formula
Marginal Revenue Formula Calculator
Marginal Revenue Formula in Excel (With Excel Template)

The formula for calculating Marginal Revenue:

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

Where,

Change in Revenue: It is the increase or decrease in the revenue in a certain period of time.
Change in Quantity: It is the increase or decrease in the number of units in a certain period of time.

Examples of Marginal Revenue Formula

Let’s take an example to understand the calculation of the Marginal Revenue formula in a better manner.

You can download this Marginal Revenue Formula Excel Template here – Marginal Revenue Formula Excel Template

Marginal Revenue Formula – Example #1

Anand Machine Works Pvt Ltd. is a manufacturer of office printing & Stationery items. Anand is currently planning to introduce the production of a new category of pens. Currently, they are producing 400 pens and sell them at $100 each. He has forecasted to produce 800 pens and will be selling them at $150. We need to find the Marginal revenue of Anand Machine works Pvt Ltd.

Here we have,

Current No. of Units Produced: 400
Current Revenue from Production: $100 each

Total Revenue from Production = 400 * 100 = $40,000

Forecasted No of Units Produced: 800
Forecasted Revenue from Production: $150

Total Revenue from Production = 800 * 150 = $1,20,000

We can calculate Marginal Revenue by using the below formula

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

Marginal Revenue = ($1,20,000 – $40,000) / (800 – 400)
Marginal Revenue = $80,000 / 400
Marginal Revenue = $200

Marginal revenue of Anand Machine works Pvt Ltd is $200.

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Marginal Revenue Formula – Example #2

Jagriti & Sons are indulged in production and selling of commodities. Jagriti & Sons are planning to introduce the production of line and expecting to increase the current production by 50%. And increase the selling price per unit by 40%. Currently, they are producing 5000 units and selling them at $140 each. We need to calculate the Marginal Revenue for Jagriti & Sons if they introduce the new production line.

Here we have,

Current No. of Units Produced: 5000
Current Selling Price: $140 each

Total Revenue from Production = 5000 * 140 = $7,00,000

Forecasted No. of Units to be Produced: (5000 + 50% of 5000) = (5000 + 2500 ) = 7500
Forecasted Selling Price: $(140 + 40% of 140) = $(140 + 56) = $196

Total Revenue from Production = 7500 * 196 = $14,70,000

We can calculate Marginal Revenue by using the below formula

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

Marginal Revenue = ($14,70,000 – $7,00,000) / (7500 – 5000)
Marginal Revenue = 7,70,000 / 2,500
Marginal Revenue = $308

Marginal Revenue for Jagriti & Sons is $308.

Marginal Revenue Formula – Example #3

Anand & Son’s Shops are in production and selling of commodities. Anand & Sons are planning to increase the current production by 50% and increase the selling price per unit by 30% to optimize their profitability. Currently, they are producing 2000 units and selling them at $50 each. They want to increase their profitability and find out the sale price of a single additional item sold. In a line of the same, we need to calculate the Marginal Revenue for Anand & Son’s Shops.

Here we have,

Current No. of Units Produced: 2000
Current Selling Price: $50 each

Total Revenue from Production = 2000 * 50 = $1,00,000

Forecasted No. of Units to be Produced: (2000 + 50% of 2000) = (2000 + 1000) = 3000
Forecasted Selling Price: $(50 + 30% of 50) = $(50 + 15 ) = $65

Total Revenue from Production = 3000 * 65 = $1,95,000

We can calculate Marginal Revenue by using the below formula

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

Marginal Revenue = $ (1,95,000 – 1,00,000) / (3000 – 2000)
Marginal Revenue = 95,000 / 1000
Marginal Revenue = $95

Marginal Revenue for Anand & Son’s Shops is $95.

Explanation of Marginal Revenue Formula

Marginal revenue can be defined as the increase in revenue, as a result of the one additional unit sold. Over a certain level of output, Marginal revenue can remain constant as it follows the law of diminishing returns and Marginal revenue can eventually decelerate as the output level increases. Firms in the perfect competition market continue producing output until marginal revenue equates marginal cost.

We can calculate marginal revenue for a company by dividing the change in total revenue by change in total output quantity produced by the company. Marginal revenue equal to the sale price of a single additional item sold.

Change in Revenue is the increase or decrease in the revenue in a certain period of time. Change in Quantity is the increase or decrease in the number of units in a certain period of time.

Relevance and Uses of Marginal Revenue Formula

For the companies in the Manufacturing Industries, marginal revenue plays a huge role in determining the production levels and product pricing.

Let’s take an example, the Market price is equal to Marginal revenue in a truly competitive market where the manufacturers are selling homogenous products, mass-produced products. In other words, we can say that the manufacturers of the differentiated products and commodities have to sell the products at the market price as they are selling in the competitive market place. The consumer can shift to any other competitor in case a manufacturer raises its price of the product. Let’s take the example of a farmer who sells barley. The cost of barley is set by the market every year. If he tries to sell the barely above the market price, then consumers will shift to its competitors as barley is not a differentiated product from other farmers.

However, this is inverse in case of highly specialized products where the production and output of the commodities or products are low. There are limited alternatives available for the products, the selling price is affected by the production level of the product. This means if the demand will be increased by supply and consumer will be ready to pay higher prices. Company adjust their output and restructure its pricing to optimize their profitability.

Marginal Revenue formula also plays a vital role in the invention of the Profit Maximization Rule. It states that a firm should select the level of output where marginal revenue is equal to the marginal cost to maximize its profits.

The profit maximization formula: Marginal Revenue = Marginal cost.

Where, Marginal Cost is the increase in cost, as a result of producing one additional unit of the product. Marginal revenue can be defined as the increase in revenue, as a result of the one additional unit sold.