Further theory on adequate revenue
For a co-product (or a group of co-products) to influence and be determining for the production volume of an activity, the revenue that it provides must exceed the marginal production costs. Therefore it is necessary to know the revenue from each co-product in order to identify if it can influence the production volume on its own, or only as a part of a combination of co-products.
The revenue is the “gross income”, i.e., the amount of money that a company receives for a specific amount of product. The revenue is calculated by multiplying the price at which goods or services are sold by the number of units sold.
Data on the price of various products are found in national and international trade statistics. More specific prices can only be found on producer’s price lists, and here it is important to note the difference between wholesale prices and the price for small retail packages.
If only one of the co-products from a joint production provide adequate revenue to cover the marginal production costs, this co-product must necessarily be the determining product. Adequate revenue is when the co-product exceeds the net marginal cost of changing the production volume.
This reasoning can be further illustrated with a hypothetical example:
Given two co-products A and B with revenues of 100 and 50 per simultaneous produced amount, respectively, as determined by the production costs of the alternative marginal production. If the co-producing activity has a net marginal production cost between 50 and 100, co-product A will be the determining product, because it is the only product that meets the above mentioned condition.
A coarse estimation will often be sufficient – and is even necessary when specific data on marginal production costs is not available: An estimate for the marginal production costs can be obtained from industry statistics (or ultimately input-output tables) by subtracting the gross operating surplus from the gross revenue. The gross operating surplus is typically below 20% of the gross revenue, and often below 10% (Business Insider). This implies that only products that contribute to more than 80% of the revenue will be able to provide enough revenue to cover the marginal production costs and thus to be immediately identified as the determining product.
How to cite this: Consequential-LCA (2023). Further theory on adequate revenue. Last updated: 2023-09-20. www.consequential-lca.org.