How to Calculate Marginal Profit

Video Transcript

"Hi! I'm Spence with the Account Team in Salt Lake City. We do accounting for people and help them fix their books up. We do a lot of work for small businesses and people who, you know, have trouble getting to it themselves. I'm going to talk today about what is called marginal profit. For a small manufacturer, this is an important thing to know. If you make a hundred items and it cost you $10 to make each item and it cost you a fixed cost with your building and insurance and salaries you have to pay people that aren't related to manufacturing cost. If you have to pay $10,000 then you got $10,000 that you got to pay no matter how many you make plus $10 per item for everyone that you make. Now, you get to a point that you're selling so many units and you have to analyze, what is my profit if I just sold one additional unit? And that would be the marginal increase in profit or the marginal profit over what you're doing. Now, if your facilities stay the same and you can just push more stuff with your same equipment then you've done pretty well and you can keep growing but in some cases you may have to get another forklift, you may have to get more storage space and marginal growth may actually profitability may go down because you have to incur extra expenses."