Introduction (graphics not included)
What is the major objective of an organisation? The concept of profit maximisation has survived for many as the major objective for an organisation for a long period. Is this still true in modern business today? Most large firms are being run and operated by management instead of the owners, how they manage the firm? Still maximising the profit, maximising sales turnover or something else?
In this essay, I will briefly outline the key points underpinning the economics of a profit maximising firm and evaluate the management model of Baumol (1959) on sales revenue maximisation to examine the modern management’s behaviour.
Profit maximisation
The neoclassical model of profit maximisation was first aroused from classical economist, Adam Smith (1776), who believed that the markets would settle on a position of natural equilibrium. He claimed based on this, the organisations will do all in their power to gain maximum benefit for themselves.
In economics, profit maximisation is the process by which a firm determines the price and output level that returns the greatest profit. The neoclassical model of profit maximisation tells us that the objective of the organisation is to optimise profits where MC=MR.
Profits are shown as a profit locus, π locus showing the zero profit level, the maximum profit level and all intermediate points. The quantity associated with the maximum profit level is Qπmax – the production quantity associated with the greatest distance between the revenue and cost curves. The quantity associated with the maximum profit level is Qrevmax – TR then declines as revenue for each unit sold as a result of discounts made to consumers to encourage them to purchase.
Profit maximisation model is based on several assumptions.
The organisation should be certain about the future, which included competitive conditions, direct relationship between pricing and profit. However, such assumption is difficult to attain by firm as the future is changing all the time.
In long term strategy, the organisation has to achieve the highest net present value.
The management’s attitude to risk is neutral.
The analyst should have highly accurate information about the organisation’s total costs and revenue, or marginal costs and revenues, or both.
Profit maximisation has been adopted by management in the company mainly because of several reasons. In order for an organisation to survive against competition in goods, services and financial market, it requires profits. Such competition forces management to pay close attention to profits. In addition, the compensation of management is closely related to profitability.
Management accounting in organisation is very important for decision-making and to make the business more efficient and therefore increasing its profits. Is the process of preparing accounts that can help managers to make day-to-day and short-term decisions, by providing them with accurate and timely key financial and statistical information...
A couple of Squares has a limited capacity for which to produce their products and smaller companies tend to have larger fixed costs than bigger companies. Therefore, A Couple of Squares must maximize profits in order to ensure that they will stay in business. A profit-oriented pricing objective is also useful because of A Couple of Squares’ increased sales goals. A Couple of Squares increased their sales goals due to recent financial troubles. Maximizing profits is the easiest way to meet these sales goals due to the fact that A Couple of Squares has limited production capacity. The last key consideration favors a profit-oriented pricing objective because A Couple of Squares offers a specialty product. A specialty product often has limited competition, therefore can be priced on customer value. Pricing at customer value will maximize profits as well as customer satisfaction. A Couple of Squares’ lack of production capacity, increased sales goals, and specialty product favor a profit-oriented pricing
Most companies’ primary goal is to maximise profit in order to remain competitive in the market. The concern usually arises in the measures and approaches companies take to achieve that goal and how it will benefit in the short-term and long-term process. (Eccles, 2011)
Even though a myriad of tools and techniques learnt in the Strategic Cost Management and Strategic Business Analysis courses are not fully exploited in this essay, it is generally recognised that those techniques are useful for a corporate to formulate strategy, do strategic planning, control costing and quality, as well as eventually elevate its values, regardless the nature and size of organizations.
Today, it is generally perceived by the public that the single and sole objective of corporations is to maximize profits (Bartlett, 2015), reflected in President Bill Clinton’s radio address in 1996 during which he stated “the most fundamental responsibility for any business is to make a profit”. This belief could be substantiated by the statistic that the profit margins of American corporations have risen from the 1980s to 2008 (Blodget, 2012), shown by the increase in nominal GDP of the United States over the period (Yardeni, Johnson, 2016). Given the above, it could be deduced that most businesses do indeed have a single objective of profit maximization and therefore tend to pursue short-term gains at the expense of all other considerations.
We probably all agree that the primary objective of any business is to achieve revenue and attain a certain profit. But then here is the question that we might ask, is profit the only element that should be considered when making business decisions? In my point of view the answer is no as I will try to demonstrate throughout this paper. One quick alternative of what should be the first top priority of a business is creating a customer as Dr.Peter Drucker said. According to him “The customer is the foundation of a business and keeps it in existence. He alone gives employment. To supply the wants and needs of a consumer, society entrusts wealth-producing resources to the business enterprise.” (Santayana, George. Is The Tyranny Of Shareholder Value Finally Ending? )
What major technology change has had the greatest impact on the quality of your life?
PROBLEM : What effective management control system or systems should the Company adopt to attain maximum profitability not only of its divisions’ respective operations but that of the Company as a whole?
A complete firm maximizes profit or minimizes loss in the short run by producing that output at which price or marginal revenue equals marginal cost, provided price exceeds minimum average v...
Classical Economics is a theory that suggests by leaving the free market alone without human intervention; equilibrium will be obtained. This theory was the first school of thought for economists and one of the major theorists and founders of Classical Economics was Adam Smith. Smith stated, “By pursuing his own interest, he (man) frequently promotes that (good) of the society more effectually than when he really intends to promote it. I (Adam Smith) have never known much good done by those who affected to trade for the public good.”(Patil) Classical Economic theory assumes three basic ideas: Flexible Prices, Shay’s Law, and Savings-Investment equality. Flexible prices in Classical theory suggests prices will rise and fall as needed but is not always true, due to, the interference of government agencies including unions and laws. Smith stated in the Wealth of the Nation (1776), “Civil government, so far it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all.” (Patil) Shay’s Law implies supply creates its own demand and demand is not based on production or supply.
Explain why a profit maximizing firm produces the output that equates marginal revenues to marginal costs (MR=MC).
Most companies are profit oriented. Companies survive and live on profit. Even governmental institutions, NGO's and NPO's are profit oriented, what they do with profit is different though. Saying this means that companies seek always to be at a position where profit is maximized. As we know by now this happens when MC=MR but this is an always changing point as supply and demand are dynamic, effectively meaning that if firms get it right once they can't just do the same eternally, they still need to adapt to every market factor as a new change is a new reality all together that needs to be studied and addressed. All of these changes happen in what is called the market, where suppliers and consumers meet to reach a level that suits the interests of both parties involved.
Managerial decisions are an important component in achieving the objectives of the organization. The success or failure of a business depend upon the decisions made by managers (Jurina, 2011). Today’s increasing complexity in the world of business brought forth greater challenges for both the firm and its managers. The rapid rate of technological and digital advance as well as greater focus product innovation and processes that influence marketing and sales techniques have contributed to the increasing complexity in the business environment.
In conclusion, profit planning is a crucial aspect of managerial accounting. Hopefully I have helped to show the importance in composing a company’s budget, the different types of budgets that may be implemented, and also how essential it is for managers to enforce and utilize them. Businesses need profit planning so that the maximum amount of profit may be generated. This is true for all forms of business whether it be for a product or service, manufacturing or retail. Without an accurate budget and diligent managers to monitor it, your company may be missing out on potential profit and growth
In conclusion, while the shift in demand curb can result from several sources, the quality of service, the tastes or even the number of buyer as presented here represent the main reason of the shifting price of an activity as the sell of ice-cream on campuses. As a businessman we should take in consideration those factors in order to be successful and trying to anticipate our rise or fall to stabilized our business. On another hand, keep in mind The most famous law in economics: “when the price of a good rises, the amount demanded falls, and when the price falls, the amount demanded rises.”