How to Calculate MRP & MFC

The marginal revenue product is the additional revenue generated by using an additional unit of labor. The marginal factor cost is the cost of using an additional unit of labor. The marginal revenue product is equal to the marginal factor cost when an optimal labor pool is utilized in the production process. The marginal revenue product and the marginal factor cost will vary by product, selling price and prevailing wage rates.

Instructions

Marginal Revenue Product (MRP)

1. Get the selling price, quantity and labor units required to manufacture a product. The price could be the wholesale price that you set for your distributors or the actual selling price in your stores. For example, if 10 employees at a small custom bike manufacturer assemble and sell 100 bikes at $500 each per month, the total revenue is $50,000 (100 x $500).

2. Track the change in output for an additional unit of labor, assuming that a company is able to sell the additional units at the same selling price. Continuing with the example, assume that adding one extra employee leads to an increase in production and sale of 7 additional bikes per month at $500 each.

3. Calculate the marginal revenue product, which is equal to the additional units sold multiplied by the price per unit. In the bike example, the marginal revenue product is $3,500 (7 x $500). Note that the marginal revenue product does not imply that each additional labor unit will lead to a $3,500 increase in revenue into perpetuity. This is because resource limitations and market forces determine how many units are produced and sold.

Marginal Factor Cost (MFC)

1. Get the additional units of labor used in production. This could involve adding new staff, increasing the total hours worked for existing staff, or a combination. Continuing with the bike example, note that one additional labor unit was employed.

2. Record the change in total cost from using the additional labor units. The labor cost includes salaries, benefits, bonuses and commissions. In the bike example, assume that the change in total labor cost is $200.

3. Divide the change in total labor cost by the change in labor inputs to calculate the marginal factor cost. To conclude the example, the marginal factor cost is $200 per additional labor unit ($200 / 1).

References

• CliffsNotes: Labor Demand and Supply in a Perfectly Competitive Market
• Pearson Education; Labour Demand and Supply; 2002