The full form of MRP is: MARGINAL REVENUE PRODUCT
What is MRP with respect to Finance?
Additional revenue generated as a result of addition of a new machine, software, person, business location or any other resource is known as Marginal revenue product or MRP. All these additions are known as inputs.
It is calculated as a product of marginal products of the input and marginal revenue of the output (MP * MR).
What is the purpose of MRP?
The main purpose of MRP system is to efficiently meet three objectives:
- To make sure if raw materials are accessible for manufacturing process and whether products are available for delivering to the customer when it is needed. Without appropriate raw materials the manufacturers cannot meet the demand of the products.
- To manage product levels in store and also maintain the minimum possible material.
- MRP can also do the later works after production like gathering and packaging, thereby proceeding smoothly. Thus MRP minimizes the time needed to manage everything.
How does MRP work?
MRP access data from the Bill of Materials (BOM) to calculate the materials as per requirements. It also uses information from inventory data and the production schedule of the master. All of these information are gathered and needed during the manufacturing process.
What’s the difference between marginal revenue product and marginal revenue?
Marginal Revenue Product
Marginal revenue product is defined as aggregate revenue obtained after additions in the the resource input (manpower, machines, software etc.)
It measures the change for every unit change in the resource or change in the variable input.
Example: Suppose addition of 4 machines resulted in a profit of 20000 rupees. Then the marginal revenue will be calculated as 20000/4 (revenue for unit change) that is 5000 rupees.
Marginal revenue is defined as the additional profit generated by selling an one extra unit of goods and services.
Companies seeking to maximize profit produce goods and services up to the point that marginal cost equals marginal revenue. Cost benefit analysis is done when marginal revenue falls below marginal cost.
Example: Suppose the total revenue obtained by 20 products is 20000 rupees and selling one additional unit of product results in a total profit of 21500, then in this case the marginal revenue of that extra product is 1500 rupees. Marginal revenue is always equal to less than average revenue.
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What are the Benefits of MRP in Finance?
- MRP system efficiently handles the optimum inventory level of both materials and parts and reduces the inventory carrying cost.
- A purchase planning is required to know what to buy and when to buy. For that a smart system is needed to track the production steps and expected material deliveries. To contact suppliers manually when needed for a purchase the procurement managers arrange MRP.
- MRP system are entirely automated and reduces human effort and intervention. Hence it is time saving.
- For not being manual there is very low chance of any manual error. The accuracy of this MRP system is very efficient.
- The manufacturing process involves a huge number of information and data. MRP system helps the manufacturers handle the entire process of inventory data, receipts, invoices etc.