Marginal Profit is a construct derived from Standard Cost Thinking. Such thought process is very helpful and can aid business thinking on many levels, and it can be insidious and undermine your financial well-being.

Standard Cost Thinking can be observed in the presumption, often unnoticed, that the next piece of work or business in and enterprise will “cost” the same hourly rate as the previous piece(s).

Presented with an opportunity to produce a product or service at some sales price, a proprietor may reject the business as unprofitable. The profit consideration may turn on some presumptions that are not obvious in a “gut check” or “back of the envelope analysis.”

Is another option available? Here’s one, beyond standard cost:
You may compare enterprise I (E1) with enterprise II (E2).

In E1, the operation continues as is. The proposed product/ service is not undertaken.
In E2, the operation is altered to the extent needed to accommodate the proposed product/service. Evaluation of this change is done on the enterprise level, pro forma, of course. That is to say, that profitability for the whole business is examined prior to making any change.

In this manner, the analysis is wider and deeper than just the new product/ service. The question to be answered is, “Which condition is more profitable, E1 or E2?”

When E2 is analyzed, we are faced with some considerations beyond the wage costs that may be associated with the proposed product/ service. Our analysis would include in the calculation any new out-of-pocket cost for additional staffing or overtime and any new equipment or facilities.

Often, this analysis does not lead to recognition of significant additional costs. We may find that the added revenue is nearly all pushed to the bottom line as net profit before tax. The revenue arrives at the profit line nearly undiluted.

One consideration area remains. It is: Will the pricing of the new business disturb the established balance in the market now served by E1? That question is not a standard cost issue.

Based on the author’s interpretation of the work of Eliyahu M. Goldratt, author of The Goal, and other non-fiction and fiction.