The company's products are significantly profitable if production costs. Characteristics, analysis and calculation of enterprise profit

For successful entrepreneurial activity enterprises in market conditions need to establish the patterns of supply and demand, as well as determine the target setting: what to produce, in what quantities, at what costs, at what prices.

In this article you will learn about the analysis and management of costs in production, sales of products and the study of their impact on the financial results of the enterprise. What ways to reduce costs will allow you to rationally distribute material and time resources and receive additional profit.

During the production process, accounting individual species costs are incurred in different ways. This is due to their belonging to one or another type of enterprise costs - fixed or variable costs.

Variable costs change in proportion to the volume of production, while the same costs per unit of output, as a rule, remain unchanged. Based on this property in the analysis variable costs they are usually initially recorded as unit quantities. Due to their invariance per unit of output, these costs are basis for solving many production planning problems.

Fixed costs when the volume of production changes, products must remain unchanged. While fixed costs per unit of production are subject to significant change. They increase when production volumes fall and decrease when volumes increase.

Consequently, when analyzing costs, fixed costs are first taken into account as a whole, and only then can they be considered, like variable costs, per unit of production.

It should be noted that the division of costs into variable and fixed costs in some cases is quite conditional character. In practice it is often difficult to distinguish variable And constant cost component. To do this, it is necessary to analyze these costs by their individual elements, the number of which can reach several dozen.

Some variable costs may not change in direct proportion to the volume of production and at the same time not be constant. An example would be wage costs or general administrative expenses. Such costs may be referred to as mixed or semi-variable costs. To get out of this situation, they can be divided into variable and constant components and these elements can be considered separately. In addition, depending on the applied accounting policy and the specifics of the organization of production at the enterprise, options are practiced for transferring part of the variable costs to the category of fixed costs and vice versa. As with the analysis of variable costs, there are some features of accounting for fixed costs. They may change if there is a significant change in production volume. Moreover, this change is, as a rule, spasmodic in nature. For example, as production volume increases, it may be necessary to rent additional production space and purchase new equipment. This, in turn, will lead to an increase in fixed costs in the amount of rental payments for new premises, as well as an increase in variable costs - operational And depreciation costs with accelerated use of equipment.

The considered examples show what dangers await the contractor when distributing the costs of an enterprise into conditionally fixed and variable costs. In addition, a subjective approach often intervenes in this process in the sense of a volitional attribution of costs to one or another type of cost based only on the formal experience of the manager. In this regard, certain difficulties arise when analyzing the impact of certain types of costs on the performance of an enterprise. All this must be taken into account to improve the efficiency of cost management in an enterprise. Indeed, in the process of production management, managers have to constantly make operational decisions. And they largely depend on the quality and completeness of ownership of the relevant information by enterprise managers to account for these costs. This is especially important if alternative options for production management at the enterprise arise. After all, we must always strive to decision was possible more balanced, and ultimately - optimal. To do this, you need to compare the options each time and choose the best one. How to correctly take into account these costs and, therefore, more effectively manage the production and sales of an enterprise’s products is shown in this article.

Cost structure management in production

In practice, especially with a small range of production and sales, fixed costs are often not divided by type of product. To do this, it is quite enough to evaluate the calculation results by the amount of marginal profit or, in other words, by gross profit (in accounting). Let's consider a classic scheme for analyzing the cost structure for an enterprise's order portfolio.

EXAMPLE 1

Let's assume that the company's portfolio has two products - A and B, the proceeds from which are distributed in a ratio of 1:3. The forecast report on production and sales profits is as follows (Table 1).

Table 1. Forecast performance indicators of the enterprise for the month, thousand rubles.
Index	Product A		Product B		Total
	absolute values	relative values, %	absolute values	relative values, %	absolute values	relative values, %
Variable costs
Marginal profit
Fixed costs
Revenue from sales
Break even
Safety margin, %

Combined analysis The profitability and break-even of a business shows the following:

1) an essential point in the assessment is that the cost structure of the products differs significantly from one another. Yes, for product A, which has the smallest volume of production and sales (revenue), the share of variable costs in revenue is 70 % , and for product B- only 40 % . All this has a positive effect on the overall profitability of the enterprise. Eventually relative contribution margin amounts to 52,5 % . Judging by the above calculations, in general case manufactured products are a very profitable business for the enterprise;

2) an important indicator for analyzing the financial stability of an enterprise isestimating the break-even point of a business(the point in terms of income (revenue) at which there is neither profit nor loss). The break-even point is usually presented in physical (units of production) or in monetary terms. The lower the break-even point of a business, the more efficient the company is in terms of making a profit.

In Western practice, the break-even point in monetary terms is usually indicated by the indicatorBEP (Break-Even Point). This indicator is defined as the ratio of fixed costs to gross profit margin:

BEP= Zpost / Vpr,

where Zpost are fixed costs;

Vpr - gross profit margin.

From this formula we can draw the following important conclusion: the higher the fixed costs, the higher the break-even point shifts to the area of ​​​​higher income of the enterprise, and this is fundamentally worse for the enterprise.

The same thing happens with a relative increase in the share of fixed costs in the total costs of the enterprise. On the contrary, the higher the profitability of products in terms of marginal profit, the lower the volume of product output corresponds to the break-even state of the business. Obviously, the same effect is observed when the share of variable costs in the company’s total costs decreases.

Calculating the break-even point of a business using the formula allows you to find the break-even sales volume for the entire portfolio as a whole:

BEP = 567 thousand rubles. / 0.525 = 1080 thousand rubles.

Taking into account the found indicator, we will evaluate the margin of safety (or strength) of the business. It is defined in relative terms as the difference between the planned sales volume and the break-even point. The higher this indicator, the safer the entrepreneur feels in the face of external threats. negative conditions(fall in revenue or increase in costs). Company safety margin(Kzb) is calculated using the formula:

Kzb = (V - Tb) / V × 100%,

where B is revenue;

TB is the break-even point.

Thus, the KZB for the entire order portfolio will be (see Table 1):

Kzb = [(1600 - 1080) / 1600] × 100% = 520 / 1600 × 100% = 32.5%.

It is known that for the financial stability of an enterprise, it is quite enough if the current sales volume (revenue) exceeds the break-even point by at least 20%. In this case, this condition is more than covered by the found value of the safety margin indicator (32.5%).

EXAMPLE 2

Let us assume that as a result of negative external influences on the market, the conditions for production at the enterprise have changed for the worse. This was due to changes in market prices for raw materials, components, components and other circumstances. As a result, for the most profitable products B the share of variable costs increased from 40 to 70%. Although for less profitable products A As a result of the use of new technological solutions, it was possible to use cheaper raw materials and materials in production. As a result, the share of variable costs in the production of product A decreased from 70 to 40%.

The results of calculating the operation of the enterprise under these conditions are given in Table. 2.

Table 2. Actual performance indicators of the enterprise for the month, thousand rubles.
Index	Product A		Product B		Total
	absolute values	relative values, %	absolute values	relative values, %	absolute values	relative values, %
Variable costs
Marginal profit
Fixed costs
Revenue from sales
Break even
Safety margin, %

From the table 2 it follows that the more profitable product is now product A. According to it, the relative marginal profit (in relation to revenue) is already 60%, while according to product B- thirty %. With the redistribution of the production and sales structure, the total marginal profit (for both products) and the break-even of the business also changed (not in better side). This is because total variable costs in absolute terms increased by 240 thousand rubles. (1000 - 760).

In relative terms, they increased from 47.5 to 62.5%. Accordingly, the relative marginal profit decreased (from 52.5 to 37.5%). Profit from sales generally fell by more than 8 times (273 thousand rubles / 33 thousand rubles).

The break-even point of the business has also changed. Its value increased in terms of income by the amount of revenue - 1512 thousand rubles. (567 thousand rubles / 0.375).

Accordingly, the safety margin dropped to an indecently low level:

Kzb = [(1600 - 1512) / 1600] × 100% = 88 / 1600 × 100% = 5.5%.

It follows that due to an increase in the share of variable costs for products that have a larger sales volume, the overall financial results of the company’s activities are greatly deteriorating. In other words, it is most profitable to increase the volume of production and sales of those products that have a smaller share of variable costs. In this particular case, the deterioration in results occurred due to the selected non-optimal ratio of the volume of output of product B and the effort expended on its production.

Thus, using this format, you can analyze the structure of production and sales, as well as build the most effective policy in the field of enterprise cost management.

The impact of fixed costs when automating production

The level of profitability and financial stability is significantly influenced by the amount of fixed costs in the company. Moreover, this influence is twofold. In the area of ​​small volumes of production and sales of products, the enterprise’s income may not overcome negative influence relatively high fixed costs. Then there is a loss. The higher the enterprise increases the volume of product sales, the greater the power of its impact on the increase in income and profit. After all, variable costs per unit of production fall, but fixed costs do not change.

If the company’s property has a large share of fixed assets, which is typical, for example, for production automation, then the level of fixed costs is also higher. This occurs due to depreciation and costs of maintaining and operating equipment. At the same time, variable labor costs are reduced. Therefore, analysis of the ratio of fixed and variable costs is actively used when justifying decisions on the re-equipment of production or the use of new technological processes. Consider the following example.

EXAMPLE 3

Let's assume that an enterprise uses labor-intensive (manual) technology to produce products. However, next year the company plans to introduce a new production line. Sales volume in both cases remains the same. Let this be 10 thousand units of jars of cosmetic face cream produced per month. They will be sold at a price of 200 rubles. for each jar.

Let's discuss both alternative technologies for producing this product. Among other arguments, the first consideration is their possible impact on the amount of profit. All calculation results are summarized in table. 3.

Table 3. Impact of production automation on profitability and break-even of products, rub.
Index	Labor-intensive technology		Automation of production
	for release	per unit	for release	per unit
Variable expenses
Marginal profit
Fixed expenses
Revenue from sales
Product profitability, %
Break even
Safety margin, %

The choice of one or another production option gives the following marginal profit effects: when automating production, the marginal profit increases, and when abandoning automation, it decreases.

For a sales volume of 2 million rubles. It is more preferable to automate the production of these products, since in this case both the marginal profit and the profit from sales are higher. In this regard, the relative profitability of products is higher (in %).

Let us now estimate the break-even point and safety margin for both methods of production. For simplicity, we will carry out calculations in thousands of rubles and thousands of units of production. For labor-intensive production, let's create the following equation: 200X = 160X + 200.

Hence the number of units of production: X = 200 / 40 = 5 thousand pieces

Critical sales volume (revenue)(Vkr) is calculated by the formula:

Vkr = P × C,

where P is the volume of sales;

C is the cost of selling one product.

Therefore, the critical sales volume (revenue) will be:

Vkr = 5 thousand pcs. × 200 rub./pcs. = 1000 thousand rubles.

Kzb = [(2000 - 1000) / 2000] × 100% = 1000 / 2000 × 100% = 50 %.

For automated production, we find the break-even point from a similar equation: 200X = 100X + 750.

Hence the critical volume of production in natural units:

X = 750 / 100 = 7.5 thousand pieces

Critical revenue will be:

Vkr = 7.5 thousand pcs. × 200 rub./pcs. = 1500 thousand rubles.

Then the safety margin will be:

Kzb = [(2000 - 1500) / 2000] × 100% = 500 / 2000 × 100% = 25 %.

As can be seen, according to the safety margin criterion, in this particular case, labor-intensive technology is more preferable. For her, the current sales volume is 50% higher than its critical level (break-even point). For automated technology, this result is worse. For her, the current sales volume is closer to the break-even point of the business, the safety margin is only 25%. Consequently, such an enterprise is subject to higher business risk. Indeed, in the event of a decline in sales volumes, profits will also fall sharply. On the other hand, with an increase in production volumes, the share of fixed costs in the cost of production falls at a higher rate than with manual technology. Therefore, if managers are confident in the possible growth of sales at a high rate, then choosing automated technology will bring significant benefits.

Transformation or shifting of costs

There is another feature of changing the cost structure. They can change, that is, move from one type of cost to another. In practice, it is sometimes possible to transfer part of the variable costs to the category of fixed costs and vice versa. In the previous section, we already saw such a possibility of redistributing fixed and variable costs when automating production.

In addition, in real conditions there are often costs that contain components of variable and fixed costs. A classic example of such costs is the following type of rent. The tenant pays the landlord a constant monthly rent. In addition, he pays an additional variable fee for each hour of operation of the production equipment installed in the leased space. Another example would be an additional fee for each entry of the tenant’s vehicles into the territory of a plant owned by the lessor. There is also a situation where additional rent is paid based on the size of the increase in storage of finished products beyond a certain batch. As an example, consider the following situation.

EXAMPLE 4

Let in option I Sales managers in a manufacturing company receive the lion's share of their compensation in the form of commissions based on sales volume. Thus, this payment becomes part of the company's variable costs. By option II On the contrary, these managers are given fixed salaries, regardless of sales volume. These costs must now be accounted for as fixed costs for the company. In the first case, variable costs will be higher, in the second - fixed costs. Let us estimate how the redistribution of costs will be reflected within the constant amount of total costs for financial indicators companies (Table 4).

Table 4. Comparison of cost distribution options, thousand rubles.
Index	Option I	Option II	Deviation, %
Variable expenses
Marginal profit
Marginal profit, %
Fixed costs
Total costs
Revenue from sales
Break even
Business security margin, %

Let's calculate the break-even point and the margin of business security for both options. For option I safe income will be maintained even up to the amount of revenue in the amount of:

BEP = 800 thousand rubles. / 0.3333 = 2400 thousand rubles.

Safety margin:

Kzb = [(3000 - 2400) / 3000] × 100% = 600 / 3000 × 100% = 20.0%.

For option II The break-even point will come earlier, already when income drops to:

BEP = 1000 thousand rubles. / 0.40 = 2500 thousand rubles.

Safety margin:

Kzb = [(3000 - 2500) / 3000] × 100% = 500 / 3000 × 100% = 16.7%.

A number of important conclusions can be immediately drawn: a reduction in variable costs by 10% with a fixed value of total costs led in this case to a shift of the break-even point by 4.2% to the area of ​​​​higher income for the company (this is worse for it). The same change results in a reduction in the level of safety margin by 16.7%. Hence, it is important that the profit that the company receives becomes more sensitive to changes in production and sales volumes.

Consequently, with an increase in the share of fixed costs, even with a decrease in variable costs, control of sales volumes becomes very important for the company. Even a small decrease in sales can lead to a greater decrease in profits than in the first option, and vice versa.

From here we can draw another important conclusion: an increase in the share of fixed costs, even with a decrease in variable costs per unit of production, always leads to the need to choose a strategy aimed at increasing sales volumes.

conclusions

With an increase in the share of variable costs in the order portfolio for products with a larger sales volume, the overall financial results of the company's activities deteriorate significantly. Therefore, it is most profitable to increase the volume of production and sales of those products that have a lower share of variable costs. The optimal ratio of production volumes of individual types of products in the order portfolio can be made based on an assessment of the marginal profitability from product sales.

When using production automation, we must strive for more complete use production capacity. Under these conditions, enterprise income and product profitability grow at a higher rate than for simple technology.

An increase in the share of fixed costs at a fixed value of the enterprise's total costs leads to a decrease in the level of business safety margin. To overcome this negative phenomenon, the choice of a company's development strategy should consist of a maximum desire to increase production and sales volumes.

V. I. Semenov, chief accountant of Lika-Design LLC, Ph.D. tech. sciences

15.1. General concept of economic costs and profits

The problems of production theory discussed in the previous chapter allow us to move on to the study of problems associated with the adoption by the manufacturer of goods of economic decisions to minimize costs and maximize the income and profit of the company.

The purpose of this chapter is to study the theoretical concepts of a company's costs, their structure, the relationship between the types and conditions for minimizing costs, as well as the reasons for the existence and direction of profit maximization.

The production of any product (service) requires the expenditure of economic resources, which, due to their limitations, have certain prices. The quantity of goods that a firm can offer on the market depends on prices and the efficiency of resource use, i.e. production costs, as well as the market price of the goods produced. Thus, the most important factor determining a firm’s ability to supply an appropriate amount of a good to the market at a certain price is production costs. The very concept of costs in microeconomics refers to an individual firm (enterprise), and by the production of goods, as is known, we mean the production of material goods, and trade and intermediary activities, and the provision of various services.

What are costs, what concept underlies the determination of costs, what approaches to determining costs exist, what is their structure?

First of all, costs are considered from the point of view of accounting and economic approaches to determining their value. With an accounting approach costs represent the actual expenditure of resources for the production of a certain volume of products purchased at market prices. Economic approach based on the concepts of limited resources and the possibility of their alternative use. Limited resources mean that, having chosen the production of one good, we are forced to abandon the production of other, alternative goods.

This is clearly seen from the production possibilities line discussed earlier, when the economic cost of producing additional units of good A is equal to the cost of producing a certain amount of good B, which will have to be abandoned.

For example, the economic costs of a student studying this material in accordance with the concept of lost opportunities will be determined by the cost of the best alternative use of the time spent that was not implemented.

These opportunity costs are called costs of lost (alternative) opportunities, and their value represents the monetary proceeds that the resource seller can receive in the most profitable of all possible alternative ways of using the resources. Economic costs represent the sum of accounting costs and the opportunity value of a firm's own resources.

If we consider economic costs from the point of view of an individual company, then in their structure we should highlight the company’s expenses for paying for supplied materials, equipment, labor, etc., i.e. purchased externally. This - external or “explicit” costs. But together with external ones, the company uses resources that belong to itself, which, as a rule, are not paid for by the company, but are involved in the creation of products, forming internal costs. To such internal or "implicit" costs include remuneration of the manager - the owner of the company, interest on the capital invested by him, etc. Internal costs are cash payments that can be received by the company for an independently used resource in the best of all possible options for its use.

Internal costs also include the normal profit received from a certain area of ​​the company's activities. If the level of profit is below normal, the company may change the direction of activity to a higher priority or even self-liquidate when the owners of the company prefer to receive a salary low level income. Normal profit is considered to be the minimum payment necessary to retain the entrepreneurial talent of the subject within the framework of a given enterprise, and equal to the alternative value of its own resource.

In accounting and economic approaches, the concept of a company’s profit is also interpreted differently (see Diagram 15.1).

Scheme 15.1.

Economic and accounting costs and profit of the company.

From the above diagram it is clear that the company’s accounting costs are exclusively external costs, and economic costs are external and internal. Accordingly, economic costs are greater than accounting costs by the amount of internal costs.

Accounting profit is defined as the difference between a firm's revenue and external costs. Economic profit is equal to the difference between revenue and economic costs, including normal profit. Hence, economic profit represents income received in excess of normal profit and necessary to maintain the entrepreneur’s interest in this activity.

The difference between accounting and economic profit is clearly visible in the following conditional example of calculating the economic profit of a company (in thousands of rubles). Let's pretend that

1. The company’s total revenue is +1000.0

2. External (explicit) costs

(cost of raw materials, materials, labor

forces, etc.) are equal - 700,0

3. Consequently, the accounting value

profit will be (item 1 – item 2) + 300.0

4. Internal ("implicit") costs of the company

(opportunity cost of time

entrepreneur alternative

cost of equity) are equal to - 200

5. Consequently, the value of economic

profit will be (item 3 – item 4) + 100.0

It should be noted that the economic approach to determining costs and profits has great importance when assessing the effectiveness of a company's decision-making and the use of its resources.

In addition to the considered points of view on the content and structure of costs, this category is also studied from the position of an individual company and society as a whole.

From the point of view of an individual company, its individual, in accordance with the accounting approach, costs of production include all elements of the costs of an individual manufacturer (raw materials, supplies, fuel, electricity, depreciation, wages, etc.), which are reflected in the cost indicator.

The social approach to costs in microeconomics is based on the fact that many production processes are often accompanied by harmful or beneficial effects on the environment. When the production process is accompanied by harmful effects, the externality takes the form of external costs. In this case, social costs differ from individual costs by the amount of compensation for damage caused by production activities. First of all, this refers to damage to human health and pollution environment. In our country, as the vital need for environmental protection is realized, the importance of determining the volume of public costs and monitoring the activities of enterprises in order to increase their efficiency increases.

15.2. Production costs in the short and long periods

From the point of view of the company, the costs of producing a product are determined not only by the prices of resources, but also by the amount of resources consumed in the production process, i.e. ultimately the technology used. Thus, the firm's costs depend on the possibility of changing the amount of resources consumed. But the volume of some resources can be changed quite quickly, for example, raw materials, materials, fuel, labor. Resources such as equipment, buildings, structures require a fairly significant period of time to change their volume.

Knowing what short and long periods are (see the chapter “Production”), you can proceed to the study of production costs in these time periods. First let's look at activity of the company in a short period, when an increase in output occurs due to the intensification of the use of production capacity. As already noted, the amount of costs is determined, other things being equal, by the volume of production, which can be expressed by constructing the following function:

where: TC is the value of total costs (in monetary terms);

Q - production volume (in physical measurement).

Since different parts of costs in a short period react differently to changes in production volume, they are divided into two components: constant and variable.

Fixed costs(FC - Fixed Cost) - these are costs, the value of which does not depend on the volume of production. This includes the costs of maintaining buildings, operating facilities and equipment, administrative and management expenses, paying off bond obligations, depreciation charges, etc. As a rule, “implicit” costs are fixed costs: they are constantly included in the costs, even if the company does not produce anything, and their level remains unchanged for all production volumes, including zero.

Thus, the sum of the firm’s fixed costs for different quantities of products produced in the conditional example presented in Table 15.1. remains unchanged and amounts to 1000 rubles.

Table 15.1.

Dynamics of general and average costs of an individual firm in the short run

Total cost indicators	Average and marginal cost
Quantity of products produced Q (units)	Amount of fixed costs (rub.) FC	Sum of variable costs (rub.) VC	Amount of total costs (RUB) TC	Average fixed costs (rub.) AFC =FC/Q	Average variable costs (RUB) AVC= VC/Q	Average total costs(RUB) ATC=TC/Q	Marginal cost (RUB) MC= TC 2–TC 1 Q 2 – Q 1
				1000,0	900,0	1900,0
				500,0	850,0	1350,0
				333,3	800,0	1133,3
				250,0	750,0	1000,0
				200,0	740,0	940,0
				166,7	750,0	916,7
				142,9	771,4	914,3
				125,0	812,5	937,5
				111,1	866,7	977,8
				100,0	930,0	1030,0

Note: The amount of fixed costs remains unchanged at all levels of production (1000). As variable costs increase from 0 to 9300, the ratio of the proportion of change in output and the proportion of change in costs varies. The increase to the 4th unit of production occurs at a decreasing pace. Then costs increase at an increasing rate per unit of output, which is reflected in the dynamics of average and marginal costs. Figures for average and marginal costs are provided to illustrate the examples in paragraph 3.

On the graph (see Fig. 15.1), fixed costs are represented by a line parallel to the x-axis (FC)

Variable costs(VC - Variable Cost) are costs whose value changes with changes in production volume. These include the costs of raw materials, materials, fuel, energy, a significant part of the labor force, etc. The value of variable costs with growth in production volume changes at unequal rates. This is confirmed by many examples from practice. At the beginning of the process of increasing production, variable costs increase for some time, but at a decreasing rate for each subsequent unit of output (from 0 to 4 units) (see Fig. 15.1). Then, from a certain point (from the 5th unit), variable costs increase, but at an increasing pace.

A numerical example of the dynamics of variable costs depending on changes in production volume is given in Table 15.1.

The increase in the growth rate of variable costs is due to the law of diminishing productivity of factors. In accordance with this law, an increase in the marginal product at the initial stage over a certain time will cause an ever smaller increase in the consumption of variable resources for the production of each additional unit of output (up to the 4th unit). Assuming that the price of all units of variable resources used is the same, the sum of variable costs will increase at a decreasing rate (up to VC = 3000 rubles). But, starting from the moment the marginal productivity falls (from the 4th unit of output), an increasing amount of additional variable resources will be required to produce each subsequent unit of output. Accordingly, the amount of variable costs from this moment increases at an increasing pace. When producing the 5th unit, the amount of variable costs increases by 700 rubles, the 6th unit - by 800 rubles, etc. The VC curve on the graph reflects the change in variable costs depending on the volume of production.

Taking into account the considered categories, what will the total volume of all production costs be equal to? Of course, the sum of fixed and variable costs. This total value is usually denoted by the term “total costs” - TC (Tota1 Cost).

Thus,

TC (Q) = FC + VC (Q),

where TC (Q) is the total cost of producing Q units of output; FC - total fixed costs; VС (Q) - variable costs for the production of Q units of output.

The total cost function can be presented in tables (Table 15.1.) and graphically (Fig. 15.1.).

The total cost curve is the result of vertical addition of the values ​​of the FC and VC lines for each value of production volume.

Considering long-term operation of the company, it is necessary to take into account the lack of division of costs into fixed and variable, since all costs act as variable quantities. Over the course of a long period, the company has been carrying out technical reconstruction of production and commissioning new production facilities. In conditions of a long period, the law of the advantage of large-scale production operates, which affects the amount of costs. However, beyond certain limits, an increase in the scale of a company leads to an increase in costs and a decrease in the efficiency of the company. Therefore, the dynamics of costs over a long period can be characterized by the presence of a positive (increasing), constant (constant) and negative (decreasing) effect of growth in the scale of production.

In practice, the difference between fixed and variable costs is essential for every entrepreneur. Variable costs can be controlled and their value can be changed over a short period of time by changing production volume. Fixed costs are mandatory and must be reimbursed regardless of production volume. So, for example, a company’s expenses for renting buildings due to depreciation of fixed capital, etc., will be incurred in a constant amount due to the impossibility of their rapid change, in contrast to variables

15. 3. Average and marginal costs

The total cost is important to the firm. No less important for assessing business performance is given to the indicator average costs, which represent the total cost per unit of output. As a rule, it is the indicators of average costs that are used for comparison with the price per unit of products produced by the company in order to determine the financial results of the company.

There are total average costs (ATC - Average Total Cost), average fixed costs (AFC - Average Fixed Cost) and average variable costs (AVC - Average Variable Cost).

Average fixed costs represent the quotient of dividing the sum of fixed costs (FC) by the number of units of output (Q):

Due to the fact that the amount of fixed costs does not depend on the volume of products produced, average fixed costs will decrease as the quantity of products produced increases. Their value tends to zero. A numerical example of the dynamics of average costs is given in Table 15.1. Graphically, the change in the AFC value is presented in Fig. 15.2.

Average variable costs represent the quotient of dividing the sum of variable costs (VC) by the number of units of output (Q):

How does the average variable cost (AVC) change with production growth? The total value of variable costs (VC) changes under the influence of the law of diminishing returns, which accordingly determines the change in the indicator of average variable costs (AVC). Under the condition of fixed production capacity at the initial stage, with an increase in production volume, the value of VC grows at a decreasing pace, and accordingly, the value of AVC decreases, i.e. As production volume increases, capacity will be more fully utilized and variable costs per unit of output will be reduced. Subsequently, as production volume increases, the value of VС increases and, accordingly, the value of АВС increases. The firm's production capacity at this stage is used so intensively that each additional unit of variable inputs increases output by an ever smaller amount. The numerical expression and graphical change in the value of average variable costs are presented in table. 15.1. and in Fig. 15.2.

Rice. 15.2. Average fixed, variable and total costs

Total average costs are found by adding the values ​​of average fixed and average variable costs for each given volume of production, or dividing the sum of total costs by the number of units of production:

ATS = AFC + AVC = TC/Q.

The digital expression and graphical change in the ATC value as production volume increases are presented in Table. 15.1. and in Fig. 15.2. The dynamics of total average costs at the initial stage is under the determining influence of average fixed costs. When a certain production volume of 5 units is reached, AVC takes on a minimum value (equal to 740). With a further increase in production volume, AVC begins to increase, and AFC continues to decrease. Accordingly, ATC will decrease until the decrease in AFC is compensated by an increase in AVC with a production volume equal to 7 units. When this production volume is achieved, ATC takes on a minimum value (equal to 914), and has a decisive impact on the change in total average costs in further will be influenced by the value of average variable costs. As production volume increases, total average costs will increase. They reach their minimum value when the volume of output is greater than average variable costs.

To analyze the activities of a company, there is often a need to use the marginal cost indicator. Marginal cost represent the additional or incremental costs associated with producing one more unit of output. Marginal costs (MC) are defined as the ratio of the change in total costs (∆TC) to the change in production volume (∆Q):

MS = ∆TC/ ∆Q,

Since the amount of fixed costs in a short period does not depend on the volume of production, the change in the amount of total costs is always equal to the change in the amount of variable costs for each additional unit of production. Therefore, MC can be calculated based on changes in the value of variable costs:

MS = ∆VC/ ∆Q,

From table 15.1 it is clear that the marginal cost of production of the first unit of production is 900 rubles, the second - 800 rubles, etc., and decreases until the fourth unit of production, and then increases with increasing production volume.

Graphically based on the data in Table. 15.1. The marginal cost curve can be shown in Fig. 15.3.

ATC

The nature of the marginal cost line is determined by the law of diminishing returns. Provided that each subsequent unit of a variable resource is purchased at the same price, the marginal cost of producing each additional unit of output will decrease as the marginal productivity of each additional unit of resource increases. This is because marginal cost is the cost of paying for an additional resource divided by its marginal productivity. This implies the relationship between marginal productivity and marginal costs: at a fixed level of price (cost) for variable resources, an increase in marginal productivity causes a decrease in marginal costs, and a decrease in marginal productivity leads to an increase in marginal costs. The relationship between the dynamics of marginal and average productivity (return) and marginal and average costs is shown in Fig. 15.4.

As shown in the graph, the MC and AVC curves are mirror images of the MP and AP curves. As marginal productivity increases, marginal costs fall as production volumes go from 0 to Q1. At production volume Q1, when marginal productivity reaches its maximum value, marginal costs are minimal. A decrease in marginal productivity is accompanied by an increase in marginal costs. (When production volume is greater than Q1). AVC reaches its minimum value at the maximum AP value at Q2.

Rice. 15.4. Relationship between productivity and cost curves

The lines of marginal, total average and average variable costs are closely interrelated. Thus, if marginal costs are higher than average costs for a certain volume of output, then the increase in total costs with an increase in output by one unit will be higher than the average costs of producing previous units of output. Average costs increase over this output interval. If marginal cost is below average cost, average cost decreases.

When producing the first unit of output, the marginal and average costs are equal. From the graph (Fig. 13.3) it is clear that the MC curve begins at the same point as the AVC curve (the values ​​of MC and AVC are equal to 900 rubles for 1 unit of output), but its decline occurs at a faster rate. The MC curve intersects the ATC and AVC curves at the points of their minimum values ​​(E1 and E2 for production volumes of 7 and 5 units). This happens because as long as the marginal value added to the sum of total or variable costs remains less than the average value of these costs, the average cost indicator decreases accordingly. In the case where the marginal value added to the sum of total or variable costs is greater than the total average or variable costs, average costs increase.

15.4. Optimization of company costs in the long term

Studying the nature and relationship of changes in average and marginal costs in a short period is important for firms operating in conditions of significant changes in demand. A future increase in demand for the firm's products may stimulate the expansion of production capacity, which will mean that the firm will operate in the long term.

A change in the value of one factor with fixed values ​​of others is typical for a short period. In the long run, the firm changes the quantity of all factors. In this regard, the problem of their optimal combination arises, which is solved using the concept of marginal product. Typically, economic theory considers the combination of two resources, but it is assumed that the analysis methodology can be used for any number of resources.

There are two approaches to solving this problem: from the position of minimizing costs and maximizing the company's profits.

Just as the consumer maximizes utility, the producer seeks to minimize costs.

The theory of choosing a combination of production factors that minimizes the firm's costs for a certain volume of output is discussed in the previous chapter. Here we should only point out that minimizing costs for a given volume of production for large quantity factors are ensured by observing the following equality:

,

where MP k, MP l, MP x – marginal product of production factors;

P k , P l , P x – prices of production factors.

Using the concepts of isoquants and isocosts when combining isoquants with isocosts, we can find the point of their tangency (A), where the firm’s costs will be minimal for a given output volume (see Fig. 15.5).

Rice. 15.5. Minimizing the firm's costs for a given output volume

In Figure 15.5. it can be seen that at corresponding prices for capital and labor, the optimal values ​​of resources will be 2 units of capital and 3 units of labor at costs in the amount of C2. Any other combination of resources will lead to increased costs, for example at points B and C.

Thus, to produce a certain volume of output, a firm, in order to minimize costs, will choose a certain combination of production factors. When production volume changes, costs also change, and therefore it is necessary to select the optimal quantity and combination of factors to minimize costs in the long term. In Fig. 15.6. shows a model for minimizing a company's costs over a long period when production volumes change.

Points A, B, C, D, E represent the points of tangency of isoquants and isocosts, that is, the minimum values ​​of costs for certain volumes of production and various combinations of labor and capital. The line connecting these points shows the optimal values ​​of total production costs and is called the long-run cost line or the firm's expansion trajectory.

The nature of the total cost line may vary depending on the direction of the economies of scale discussed in the previous chapter (constant, increasing and diminishing returns.

0 C1 C2 C3 C4 C5 L

Rice. 15.6. LTC cost line on the isoquant map in the long run

With constant returns to scale, the firm's total cost curve (LTC) looks like a straight line emanating from the origin (see Fig. 15.7.)

K

L1 L2=2L1 L Q1 Q2=2Q1

Rice. 15.7. Production function and cost function with constant returns to scale.

The graph shows that a proportional increase in labor and capital from L1 to L2 and from K1 to K2 causes, provided prices remain constant, the same increase in costs from LTC1 to LTC2 with a corresponding increase in output from Q1 to Q2. Thus, total costs increase in the same proportion as production increases. The volume of output in this case grows in proportion to the increase in the volume of resources used.

With increasing returns to scale, the growth in output outpaces the growth in the amount of resources used (see Fig. 15.8. a))

L1 L2< 2L1 L Q1 Q2=2Q1

Rice. 15.8. Long-run cost line with increasing returns to scale.

The volume of production Q2 is twice the original volume of production Q1 (Fig. 15.8. b)), while the size of capital and labor increases to a lesser extent (K2< 2K1, L2 < 2L1 см. рис. 15.8. а)). Это означает, что рост общих издержек происходит в меньшей степени (C2 < 2C1), чем двойное увеличение объёма производства с Q1 до Q2.

Accordingly, the LTC line has a convex appearance in relation to the x-axis, which means a lower growth rate of costs compared to the growth rate of production volume.

With diminishing returns to scale, the increase in the amount of resources used exceeds the increase in output (see Fig. 15.9. a)).

The volume of production in the variant under consideration also doubles from Q1 to Q2 (Fig. 15.9. b)), and the size of capital and labor increases to a greater extent (K2>2K1, and L2 > 2L1, see Fig. 15.9.a) ). This means that the increase in total costs (C2>2C1) exceeds the double increase in production volume (Q2=2Q1).

C2

L1 L2 > 2L1 L Q1 Q2=2Q1

Rice. 15.9. Long-run cost line with diminishing returns to scale.

Thus, production costs grow to a greater extent than the volume of output, which corresponds to the concave line of the total costs of the LTC company with respect to the y-axis.

In the long run, increasing returns to scale when the firm reaches a certain size at Q1 is replaced by decreasing returns to scale. In this regard, the nature of the line of long-term total costs of the company will correspond to that shown in Fig. 15.10.

Rice. 15.10. The firm's long-run total cost line.

When the positive effect predominates until production scale Q1 is reached, the convex nature of the total cost line is replaced by a concave nature when the negative effect predominates.

The nature of changes in the values ​​of average and marginal costs in a long period differs significantly from their behavior in the short-period conditions discussed above. So, taking into account the above regarding the features of changes in production costs over a long period, we can consider the nature of the average cost lines (Fig. 15.11.).

0 Q1 Q2 Q3 Q4 Q5 Q

Rice. 15.11 Average costs in the long run with varying returns to scale.

It can be seen that the average cost curve in the long period LAC is tangent to the average cost curves SAC1, SAC2, SAC3, SAC4 and SAC5 in short periods at points A, B, C, D and E, characterized by output volumes Q1, Q2, Q3 , Q4 and Q5. Moreover, the LAC line does not intersect the average cost line at any point in short periods.

The LAC line does not pass through the points of tangency with the lines SAC1, SAC2, SAC4 and SAC5 at minimum values ​​of average costs in short periods and means that the smallest changes in the volume of production are accompanied by corresponding changes in the size of the firm.

The minimum value of the short-term average cost line SAC3 corresponds to the minimum value of the long-term average cost line LAC (with changing returns to scale) only for such a volume of output (Q3) when average costs in the long run are minimal.

Using this model, the problem of minimizing the average costs of a company in the long run can be solved. By changing the volume of output for each given volume of output (Q1, Q2, Q3, Q4 and Q5), one can find the optimal combination of variable factors of production that minimizes the firm's average costs.

The LAC value decreases as production volume increases from Q1 to Q3, and then increases from Q3 to Q5. This means that with the expansion of production volume (more than Q 1), the rate of increase in production exceeds the rate of increase in costs with the involvement of additional factors of production. This is explained by the effect of the “economy of scale”, when an increase in the number of factors used makes it possible to reduce costs per unit of production due to the deepening specialization of production. Subsequently, with an increase in production volume beyond Q3, the “economy of scale” leads to the opposite results - an increase in costs, which is shown by points D and E. That is, the optimal production volume in the long run is at the level of Q3, and corresponds to the minimum value of the LAC line at point WITH.

Depending on the ratio of positive and negative scale effects, the nature of the long-term average cost lines can be different: decreasing, rising, unchanged.

Thus, in some industries related to natural monopolies, average costs reach a minimum with a sufficiently large volume of production. In other industries (enterprises light industry, trade, etc.) there is a situation of constant returns from the growth of the scale of production, when the value of average long-term costs, while sharply decreasing, subsequently remains unchanged over a large interval of changes in production volume. This makes it possible for both small and large firms to function effectively, and, accordingly, the advisability of creating new ones rather than expanding existing ones.

It should be noted that the main method for determining the optimal volume of production by a company is to compare the magnitude of marginal and average costs.

The concept of average and marginal costs is important not only in theory, but also in business practice, since it allows you to determine those costs, the value of which can be directly controlled by the company, therefore, it implies the possibility of implementing control actions on the amount of costs and production efficiency in general .

Minimizing a company's costs is a means of increasing profits, and, consequently, ensuring a stable position of the company in a market economy.

15.5. Economic profit and revenue of the company

Previously, we examined the concepts of accounting and economic costs and profits, the relationship and differences between these categories.

In modern microeconomics, profit is interpreted as one of the forms of payment for resources - in this case, payment for entrepreneurial activity.

Profit - as an economic category, reflects the net income created in the sphere of material production in the process of entrepreneurial activity. It characterizes the economic effect of the company’s activities and reflects its final financial result.

A firm's total revenue may exceed its total costs. It is the excess, or excess, of income over economic costs that represents economic profit.

Income represents the proceeds from the sale of the company's products and services. A company's revenue means the amount Money received to the current account and to the cash register from the sale of manufactured products for a certain period of time.

In the future, we will use the term “revenue” to denote this concept.

In its most general form, a firm's total revenue is determined as follows:

TR = P*Q, where

TR – total revenue;

P – product price;

Q – volume of production.

Along with total revenue, microeconomics also uses the concept of average and marginal revenue.

Average revenue (AR) of a firm is its sales revenue per unit of output over a specified period of time.

Average revenue is equal to the price of products sold. In this regard, the dynamics of average revenue is characterized by the demand line for the company's products.

Price (P) in this case represents what the company receives from the sale of a unit of output.

Marginal revenue (MR) is the change in total revenue (DTR) resulting from a one-unit change in output (DQ).

Where DQ = 1

Marginal revenue means that as output increases by DQ units of output, total revenue increases by DTR of monetary units.

The firm's profit can be determined as follows:

π = TR – TC, where:

π – profit,

TR – total revenue,

TC – total costs.

In conditions of market relations, as evidenced by world economic theory and practice, there are two main reasons for the existence of economic profit:

1. Due to the risk that an entrepreneur is exposed to in the process of doing business;

2. Due to the possibility of establishing a monopoly price for products.

In the first case, there may be no entrepreneurial risk under certain circumstances. Thus, in a static economy, economic profit would be zero. A static economy is one in which the supply of resources, technical knowledge and consumer tastes are constant and unchanging, i.e. in these conditions there is no economic uncertainty.

Consequently, any economic profit that may exist initially in various industries will disappear with the influx or outflow of firms over a long period. To the greatest extent, this concept corresponds to the conditions of an administrative-command economy.

In a dynamic economy, the future is always uncertain. Therefore, economic profit is considered as a reward for risk, which is distinguished between insurable and non-insurable. The company can avoid the insured risk by paying costs in the form of insurance premiums (in case of fire, accident). An uninsurable risk is the uncontrollable and unpredictable changes in demand, revenue and supply (costs) that the company faces. For example, changes in economic conditions due to economic cyclicality. In addition, changes occur in the structure of the economy, when some industries develop as a result of changes in tastes and resource supplies, while others reduce production. That is, the profit of uninsurable risk arises due to cyclical and structural shifts in the economy. These changes act as external factors for the company.

Internal factors, determining economic profit are innovations associated with the initiative of the entrepreneur. The company is introducing new methods of production and distribution, new types of products to reduce costs and increase income levels in order to obtain economic profit. But innovation can lead to uncertain results. Innovative profit in a competitive environment can be temporary. Costs may exceed temporary economic profits, and a rival adopts innovations without costs, i.e. as a source of profit. Thus, innovation is a special case of risk.

The second main reason for obtaining economic profit is associated with the establishment of a price for a unique product produced by a monopolist that exceeds the price for its production under conditions of perfect competition.

Monopoly profits arise from limiting output and preventing monopoly competitors from entering the market, thereby artificially limiting supply. Monopoly profit is based on maintaining production volume, ultra-competitive prices, and irrational distribution of resources.

A monopolist controls the market and can minimize negative impact uncertainty (due to advertising, counter-cyclical government policies, reliable sources of materials through the creation of a vertical technological structure production, investment in new goods, etc.), thereby maximizing economic profit.

The profit maximization assumption is often used in microeconomics because it allows one to fairly accurately predict the behavior of firms.

The problem of profit maximization is relevant, of course to varying degrees, for any company, regardless of the type of market structure.

Profit can be maximized either by increasing the firm's revenue or by reducing costs.

The company's revenue, costs and profits depend on the volume of output. Therefore, to determine the profit-maximizing volume of production of a company, it is necessary to analyze its revenues and costs.

With small volumes of output (up to Q1), the company's profit is negative - revenue is insufficient to compensate for fixed and variable costs. Profit is negative for production volumes from 0 to Q1 due to the presence of fixed costs. In this case, marginal revenue is higher than marginal cost. This indicates that an increase in output leads to the emergence and subsequent increase in profits. As production volume increases, profit becomes a positive value (when output volume is greater than Q1) and grows until output volume reaches Q2. At this point, marginal revenue coincides with marginal cost and volume Q2 ensures the maximum difference between TR and TC and, accordingly, profit maximization.

Segment AB represents the greatest distance between the revenue and cost curves in the area where revenue exceeds costs (from Q1 to Q3), which reflects the achievement of the largest value of π. At points to the right of Q2, marginal revenue is less than marginal costs and the amount of profit decreases, reflecting the rapid growth of total costs over total revenue.

,

This equation characterizes isoprofit lines, i.e. all combinations of applied factors of production and output that give a constant level of profit. As the value of π changes, we can obtain a set of parallel straight lines, the slope of each of which is equal to P L /P, and the point of intersection with the ordinate axis is given by the expression:

showing the amount of profit and fixed costs of the company. Since fixed costs are fixed, the variable variable is profit, the different levels of which are shown by different isoprofit lines.

Therefore, the problem of profit maximization can be reduced to finding the point of tangency of the line production function with the highest isoprofit line (i.e. E), where the slopes of the indicated lines are the same.

In the long run, a firm can choose the level of use of all factors of production. Therefore, the problem of maximizing profit in the long run can be formulated as:

Pf(L,K) – P L L – P k K

This is basically the same problem as described above for the short run, but now the quantities of both factors of production can change.

The condition describing the optimal choice remains essentially the same as before, but now it is necessary to apply it to each factor.

As shown earlier, regardless of the level of use of factor K, the value of the marginal product of factor L must equal the price of this factor. Now the same kind of condition must be met for the choice of each factor of production:

PMP L (L * , K *) = P L,

PMP K (L * , K *) = P k .

When a firm chooses optimally the number of factors L and K, the value of the marginal product of each factor must equal its price.

Thus, at the lowest cost, a firm can produce different quantities of products. But there is only one level of output at which profit is maximized. What will be this volume and combination of resources?

According to the rule of resource use, profit maximization is achieved by using the amount of resources that ensures that the price of the resource is equal to the marginal product in monetary terms. For example:

In this case, a firm in conditions of perfect competition uses a combination of resources that maximizes profit.

This condition can be expressed as follows:

It follows that when attracting additional resources into production, a firm must comply with the rule that the revenue from the marginal product of a resource must equal the market price of this resource.

Compliance with this rule indicates the rational use of resources and high degree production efficiency. It is considered most appropriate to apply the principles of replacing one resource with another if it is possible to promptly change the volume of resource purchases. First of all, this applies to working capital (raw materials, materials, energy).

Cost - expressed in monetary terms, in accordance with the accounting approach, the current costs of the enterprise for the production and sale of products. It is used in the practice of production and economic activities of Russian enterprises.

1 In accordance with the law, a consistent increase in a variable resource leads, from a certain point, to a decrease in the marginal product per each subsequent unit of the resource and an increase in variable costs. The content of the law is discussed in more detail in the chapter “Production”.

We talked about what production costs are in ours, cited the main accounts used in cost accounting, and also considered some aspects of planning the costs of production and sales of products. Let us recall that the costs of production and sales of products represent expenses for ordinary activities that are associated with the performance of work, the provision of services, the production of products, as well as their sale.

Production costs per unit

In matters of product cost management and pricing, it is important to calculate not so much the total cost as the cost per unit of output. Unit costs can be calculated based on total costs, production costs, variable costs, fixed costs, etc. In any case, the cost per unit of production (Z UP) will be calculated according to the formula:

Z EP = Z/K,

where Z is the analyzed costs attributable to a certain number of manufactured products (K).

Considering that the composition of the costs of production and sales of products is varied, and the specific list of costing items depends on the type of product, technology features, scale of activity, etc., then the analysis of costs per unit of production can be carried out in the context of a specific item or element of costs. The level of detail in this case will depend on management needs.

As for terminology, the cost per unit of output is usually called average. They can be direct averages, variable averages, constant averages, etc. When average costs are found that include the cost of all resources used, they are often also called unit costs.

Naturally, an enterprise's products are significantly profitable if production costs are significantly lower than the income from the sale of such products.

It is also believed that the average total costs of production reach a minimum value at a volume of production at which they become equal.

Or companies are called upon to characterize it in four main areas: 1) the liquidity of the company 2) the amount of borrowed funds attracted by it 3) the turnover of its capital and 4) the profitability of the company.

This chapter and the next show how capital balance can be achieved in well-managed, profitable companies. The purpose of this chapter is to:

The main reason for the existence of leases is that companies and individuals receive various tax benefits from owning assets. In general, a profitable company may not be able to reap the full benefits of accelerated depreciation, while highly profitable and taxable corporations and individuals may be able to do so. The former can receive most of the overall tax benefits by leasing assets from the latter party instead of purchasing them. Due to competition between landlords, some of the tax benefits may be passed on to the tenant in the form of lower rent payments than might previously have been the case.

The main attention when concluding such transactions is paid to the exchange ratio market prices shares of participating companies. When assessing the true value of a company, investors pay attention mainly to the market price of its shares. This price reflects the company's potential profitability, dividends on its securities, business risk, its capital structure, asset value and other measurable factors. The exchange ratio of market prices of shares is calculated as

The obtained data allows us to conclude that the financial condition of the company has improved from 01.01.95 to 01.10.95, as evidenced by an increase in the express rating assessment by 120%. This is primarily due to an increase in the company's profitability by 193%. During this period, it managed to leave the zone of unsatisfactory financial condition by increasing the share of its own working capital by 71% and the intensity of turnover by 58%.

Shareholders are primarily interested in obtaining stable and increasing profits. The share held matters because shareholders expect to receive dividends at some point in the future. However, many fast-growing or highly profitable companies choose to reinvest their profits rather than pay dividends. Consequently, the value of shares in this case will be determined to a greater extent by expectations of dividends in the distant future, rather than by current payments. If a company does not pay dividends but stock prices rise, then the shareholder can make a profit by selling his shares. The manager's entrusted responsibility is to direct the organization's activities in such a way that shareholders receive the maximum possible profit.

For the company we are considering, coefficients /C, = 1.9 and K2 = 1.2 indicate a fairly high liquidity of working capital, coefficients K3 = 2.8 and Kt = 1.6 indicate moderate efficiency in the use of current assets, coefficients /C6 = 8.3 and Ks = 1.5 - about the profitability of the company. The bankruptcy probability indicator (Z) was more than 3.2. which, according to generally accepted methodology, means a very low probability of this event in the near future.

In management practice, knowledge accumulation is basically the process of recognizing and summarizing information, systematically collecting and organizing it, providing access to it and preparing it for the purpose of using everything that can help increase the profitability of the company and gain competitive advantages in the market.

The study of the income statement includes two main areas of analysis - the receipt of funds and their expenditure. Companies are profitable if revenues exceed the costs associated with generating revenues. Profits do not equal cash, which must be used to pay off all debts. However, a company's profitability is the primary factor that provides cash to repay debts and induces a lender to make a loan.

After examining the receipts shown on the income statement, the analyst must move on to consider the related expenses incurred by the firm. The ultimate goal, of course, is to evaluate a company's past profitability and make an informed proposal about its future profitability. The immediate goal is to determine the agreement on the amounts of expenses.

Some companies have receipts other than sales and expenses other than those included in cost of goods sold or operating expenses. After assessing a company's operating profit, the analyst must consider income and expenses outside the normal operations of the business to determine how significantly they contribute to the company's overall profitability and how likely such income and expenses are in the future.

After taxes on corporate income are subtracted, what remains is net income after taxes - the bottom line of the report. Analyzing the dynamics of net profit over a number of years allows us to assess how consistently management has pursued policies in the past and what the company's possible profitability is in the future. The company's profit should also be compared with the performance of similar companies and industry averages. This comparison is intended to help the credit analyst put the company's performance into perspective.

Is the company's profitability sufficient to service its debt?

Is the company's profitability sufficient to service its long-term debt?

During the period of rising sales, the company's profitability declined, so the company's ability to finance operations decreased.

Analysis of the cash flow statement is focused on assessing the sufficiency of cash flows from core activities, the feasibility of capital investments and the structure of financial transactions associated with cash. Findings can often be confirmed or refuted by comparative analysis using the previous year's cash flow statement. Thus, when analyzing a growing, profitable company, many credit analysts immediately conclude that the company is thriving (which is true in most cases). However fast growth, even accompanied by the receipt of profit, can lead to insolvency, since the company's need for working capital may exceed its internal financial capabilities, and the need for external financing may exceed its ability to borrow. Although there are different kinds cash flows, called by various names, the advantage of the book's cash flow statement is that it allows cash inflows and outflows to be clearly identified and grouped according to origin - in other words, the company has a current operating cycle, makes decisions about long-term investments, and then finances the corresponding operations, and each direction corresponds to cash flows.

Profitability is in some ways less important than cash flow because it refers to a company's long-term viability rather than its ability to pay off debt. A company's profitability typically involves relating profits to various metrics, such as sales, assets, and equity. Taken together, these calculations provide a good indication of a company's ability to survive and continue to raise new equity capital or debt.

Consider, for example, Company X and Company Y. Given the same sales volume, Company X makes $5,000 and Company Y makes $10,000 in profit. At first glance, Company Y is more profitable. Let's say, however, that Company Y requires $50,000 in assets to generate its sales, while Company X only needs $15,000 to generate the same sales. Therefore, Company X made more profit per dollar of assets employed than Company Y. It is possible that both companies required different amounts of shareholder investment to secure a given amount of assets. So an analyst needs several indicators to assess a company's profitability.

The profit/asset ratio (ROA) characterizes the profitability of companies, i.e. How efficiently it uses its assets. In principle, it is based on a comparison of net income and total assets. It is often miscalculated because it does not take into account fluctuations in earnings due to different levels of interest expense. In theory, the interest paid is part of the return on assets (after deducting cost of goods sold, operating expenses, etc.), but this part goes to creditors, not shareholders. If interest expenses are ignored when calculating the return on assets, the presence of significant borrowed funds in itself will lead to a decrease in the ratio compared to a company without more debt, and this veils how effectively company management manages assets.

Over two years, the company's profitability decreased from 2.8 to 1.3% of turnover, return on assets from 8.7 to 6.3%, and return on equity from 17.5 to 9.2%.

More profitable companies have more taxable profits to protect and are therefore less likely to suffer the costs of financial distress. Therefore, the trade-off theory assumes high debt ratios. In reality, more profitable (profitable) companies borrow less.

Whether a purchasing branch should buy a product from outside or purchase it from another branch depends on what is more profitable from a corporate profit standpoint. Typically, the buying department purchases a product from another department at the maximum selling price (73), since the selling department has idle capacity and must cover its fixed costs. How the company's profitability is affected by external purchases of a product is shown in the table below.

However, one should not unequivocally interpret a drop in a company’s profitability as a harbinger of imminent bankruptcy. The opposite is also true: an increase in profitability does not always indicate operational efficiency and favorable prospects for the enterprise. The relationship between profitability, solvency and efficiency is quite complex and not at all straightforward. Since the financial result is formed under the influence of many factors of both the external and internal environment of the enterprise, making a serious “diagnosis” will require a complete, comprehensive analysis of not only the financial statements, but also the market position of the enterprise.

Thus, by raising their prices, American producers of soft drink concentrates introduced prices in the 70s and 80s. a certain contribution to eliminating the profitability of bottling companies, which, experiencing fierce competition from manufacturers of powdered mixtures, fruit and other drinks, could only raise prices very slightly.

However, it must be taken into account that, firstly, the creation new brand requires significant investment. Secondly, you should not create too many brands. Each of them, as a rule, especially if they are created for one product line, occupy only a small market niche and do not become sufficiently profitable. The company scatters resources, thereby reducing the efficiency

Company profitability. Profitability in this case refers to profitability indicators, calculated in several varieties as the ratio of gross Pval or net Pl profit to the cost of goods sold Cp, or to the company’s equity capital Kc

The Wheatdale Group recently completed a major business restructuring process, during which the company got rid of all "non-core" activities. The company specializes in providing financial services. However, on the stock market, the company’s profitability prospects are assessed as uncertain; a series of critical press publications about labor conflicts that arose during the restructuring added fuel to the fire.

Profitable companies expanding their operations often find themselves short on cash and must borrow money to pay their obligations.

Using the example of the Merk company, it is revealed unusual fact Regarding capital structure, most profitable companies generally make minimal borrowing27. Here the trade-off theory does not work because it assumes exactly the opposite. According to the trade-off theory, high profits mean great opportunities By

The cost of a product (work, service) exceeding its sales price indicates that, given the current price and sales volume, the production of the product is not fully justified. Usually this statement ends with “does not justify itself” without specifying “completely”, which significantly changes the meaning of the phrase and the conclusions based on it. In particular, the logical conclusion is to refuse to produce a product that does not justify the cost of its production. Of course, first we consider the possibility of increasing the selling price of the product or increasing its sales volumes (which will reduce the cost of the product). If this possibility is absent, the conclusion is often obvious - discontinuation of the product.
It is worth remembering that the cost of a product (work, service) combines not only the costs directly related to its production, but also the costs of other workshops, plant management, and auxiliary production that do not have a direct connection with the analyzed product. Refusal to produce a product that is unprofitable at full cost will lead to a reduction only in those costs that are directly related to its production. Other costs that were “present” in the cost price, but did not have a direct connection with its production, may remain unchanged. For example, the costs of maintaining equipment, workshop buildings and plant management included in the cost price, wage managers (components of general shop and plant expenses) may not undergo any changes due to the refusal to produce any product.
Thus, optimizing profits by refusing to produce an unprofitable product is possible if all costs included in the cost of this product are reduced. Such a case (reducing all costs included in the cost of production) is the exception rather than the rule. In the vast majority of cases, refusing to produce an unprofitable product will lead to a reduction of only part of the company’s expenses. The decision to discontinue a product that is unprofitable at full cost will be effective (i.e., it will lead to an increase in company profits) if the following condition is met (Fig. 5.3):
Revenue from the sale of the product i + Direct fixed costs associated with the production of the product i).


from production
If the revenue received from the sale of a product that is unprofitable at full cost exceeds the direct costs of its production, then such a product makes a certain contribution to cover other costs not directly related to the production of this product, i.e. brings income to the company. If at the same time there is a loss at full cost, then we can say: the contribution made by the product to cover all costs is insufficient (i.e., the foam or sales volume of the product is insufficient to cover the full costs of its production), but there is still a contribution. With a product for which the situation presented above is observed, one can proceed, in particular, as follows.
An obvious, but not always easy to implement solution: increasing the price and (or) sales volumes of the product.
If the company's overall sales are profitable (total sales revenue covers total production costs), you can leave everything as it is for now. In this case, you will have to keep in mind that the range of manufactured products includes products that bring in less income than would be desirable.
Replace the production of the product in question with a new product for which the condition is met [revenue of the new product - (Variable costs + Direct fixed costs for the production of the new product)] >
Revenue of the product in question - (Variable costs + Direct fixed costs for the production of the product in question)]. Simply refusing to produce the product in question will, unfortunately, deprive the company of its contribution to overall overhead costs, albeit small, and thereby reduce its profits.
Conditional example. Decrease in the volume of profit received when refusing to produce an unprofitable product (Company 3)
Product position name
Table 5.14. Calculation of the effect of discontinuing a product that is unprofitable at full cost
Products Product 2 Product 3 Existing profit of the company (taking into account 2G00- 1560- 800 = 240 production of product 2, unprofitable at full cost), thousand rubles. Removal of product 2 from production Volume of production (units per month) 15 0 5 Price per unit of production, thousand rubles. 100 0 120 Variable costs per unit of production, thousand rubles. 60 0 7fi Leasing payments, thousand rubles/month. 0 0 0 Rent of additional production premises, 0 0 0 thousand rubles/month. General production costs, thousand rubles/month. 62С Existing profit of the company (taking into account (15 x 100+ 5x 120) - production of unprofitable product 2) thousand rubles/month. -(15x60 + 5 x 76) - 620 = 200 As the calculation shows, as a result of abandoning the production of an unprofitable product, the company’s profit did not increase, but rather decreased. Analysis of the change in the company's costs due to the refusal to produce product 2 allows us to discover the reason for this situation. Due to the refusal to sell product 2, the company will no longer incur variable costs: raw materials, technological energy, wages of workers (which will be true if the workers involved in the production of product 2 are laid off. If the reduction does not occur, wages will remain part of the company's expenses). The company will also not bear part of the fixed costs, in particular those associated with renting premises and leasing production equipment (which is not a fact, since there is a leasing agreement). Other overhead costs will basically remain at the same level: lighting, heating, repairs of workshops involved in the production of products 1 and 3 will remain the same as before. In other words, if the company refuses to produce product 2, it will cease to bear only part of the costs that were included in the cost of this product. As a result
Calculation of the cost of individual products showed that the range of products sold includes a product that is unprofitable at full cost. This is product 2. The company is considering discontinuing product 2 in order to maximize its profits. If we analyze what expenses the company will incur after removing product 2 from sale, we will get the following figure (Table 5.14).
The “loss” of a bundle from the sale of product 2 turned out to be greater than the “gain” from the reduction of direct costs associated with its production. It is possible that some elements of general business expenses or elements of shop expenses for products 1 and 3 will nevertheless be reduced due to the abandonment of the production of product 2. In order for the decision to remove product 2 to be objective and have an effect, this reduction must exceed value 40. Value obtained from analysis of the condition: 10 units. x 50 rub./unit There may be doubt that the drop in profitability is caused by the following reason: product 2 is incorrectly called unprofitable; the real unprofitable product, as the initial calculation showed, is product 8. Carrying out a similar calculation 4 if we refuse to produce product 3, we will get an even greater drop in profit companies.
The condition specified in formula (58) is valid not only for making a decision on discontinuing certain types of products, but also for solving a similar problem for structural divisions of a company or holding.
Example from practice. Unjustified reduction in sales. trading company networks
"a trading company with an extensive sales network has set the task of assessing the profitability of the activities of individual trading enterprises (retail outlets) included in the network. A comparison of income and costs for individual trading enterprises showed that some of them are unprofitable. As a result, a decision is made abandoning unprofitable units in order to maximize company profits. this decision, the company discovers that the opposite effect was obtained: the company's profits decreased. The explanation for this situation lay in the peculiarities of the company's structure and ignoring the rule represented by the formula: (58).
The structure of the company has a specific feature in that the parent organization does not carry out trading operations, but carries out all the work related to the acquisition of goods. The tasks of the parent organization include searching, establishing and maintaining contacts with suppliers, ensuring the most favorable conditions for purchasing goods (for resale), financing purchases (receiving and returning loans), delivering and storing goods, financing an advertising campaign to promote the company's brand. Sales of goods to the final buyer are carried out directly by trading enterprises (retail outlets).
The parent organization, being a cost center, but not a profit center, distributes its expenses among trading enterprises. Thus, the costs of each trading enterprise include two components. The first component is the direct costs of a particular trading enterprise: the cost of paying its employees, fees for renting space, payment utilities and other administrative expenses. The second component of costs is the share of the company's expenses allocated to a given trading enterprise.
The abandonment of a number of trading enterprises led to a reduction in only the first part of costs - the direct costs of a specific point. The costs of the parent organization remained unchanged (the abandonment of a number of retail outlets did not affect either the number of staff or the costs of maintaining the office of the parent organization). As it turned out later, the income generated by the reduced trading enterprises covered the actual costs of their maintenance. The cause of the losses was precisely that part of the costs that represented the distributed costs of the parent organization. In other words, each trading enterprise made a swap contribution to cover the overhead costs of the parent organization; however, according to some company data, the contribution was not sufficient for the current level of costs of the parent organization. Having lost these outlets, the company “lost” revenues, albeit insufficient, but nevertheless worsened its financial position.
In this case, a possible lever for optimizing profits would be to reduce the costs of the parent company. I Another possible optimization lever would be the expansion of the sales network, which would allow reducing the share of the parent organization’s costs in the costs of individual trading enterprises