Marginal Analysis

What is Marginal Analysis?
It is a very useful tool for decision-making. From the correct segregation of costs into variable and fixed costs per product contribution margins are determined.
With this information the breakeven point, which is the volume or level of activity in which the income is equal to total costs is determined.
Some concepts
Before turning to the calculation of the breakeven point it is appropriate to clarify certain concepts that make up the calculation.
a) Fixed and variable costs
Fixed costs are those that do not vary according to the different levels of production.
Variable costs fluctuate according to production volumes therefore can be expressed as follows:
VC = vc * q
Where
CV = total variable costs
cv = variable costs per unit of production
q = production volume
b) Income
Total revenue equals unit selling price by the number of units produced.
I = sp * q
c) Marginal Contribution
The unit contribution margin is the difference between the unit selling price and unit variable costs.
mc = sp - vc
The total marginal contribution is the sum generated by all units produced contributions, therefore, can be calculated as the product of the unit contribution margin and the number of units:
MC = mc * q
But it is also equal to the difference between total revenue and total variable costs:
MC = I - VC
The marginal tax rate is equal to 1-vc / sp
How breakeven determined?
There are two ways to calculate it:
a) The point of physical balance, that is, the number of units produced in which the organization reaches equilibrium, equals total fixed costs divided by the unit contribution margin.
Q = FC / mc
b) The monetary breakeven point is the volume of sales, expressed in monetary terms achieves balance, and is given by the ratio of fixed costs and the marginal tax rate.
I =    FC       
    1-vc / sp
What applications does Marginal Analysis?
Direct Costing is used as a tool to support the decision-making process in various situations.
Some of these include:
a) Pricing policies
b) Product Mix
c) Use of idle capacity
d) Decisions about make or buy
e) Gross sale or after some processing
f) Removal of products or lines
g) Etc.