profit maximization and cost minimization

is the making of gain in

Business activity for the benefit of

the owners of the business.

The cost of all factors of production.

The total amount of money that the firm

receives from sales of its product or other

sources.

Profit is the surplus of revenue over and

above all paid-out costs, including both

manufacturing and overhead expenses.

It is the difference between a Company’s

total revenue and its opportunity cost.

A monopolist maximizes profit by choosing a

quantity where marginal revenue equals marginal

cost

A process that companies undergo to determine the

best output and price levels in order to maximize its return.

Total Revenue Total cost Method

Marginal Revenue Marginal Cost

Method

PROFIT = TR-TC

Total Revenue (TR): This is the total income a firm receives.

Total cost: refers to the total expense incurred in reaching a particular level of output; if such total cost is divided by the quantity produced, average or unit cost is obtained.

MARGINAL REVENUE:IS THE CHANGE IN REVENUE WHICH COMES FROM SELLING AN ADDITIONAL UNIT OF OUTPUT.

MARGINAL COST:IS THE CHANGE IN COST WHICH COMES FROM PRODUCING AN ADDITIONAL UNIT OF OUTPUT.

Haziness of the concept “Profit”

Ignores Time Value of Money

Ignores the Risk

Ignores Quality

- Aims to achieve the most cost-

effective way of delivering goods

and services to the required level of

quality.

Lower unit cost (competitiveness)

Higher gross profit margin

Higher operating profits

Improved cash flow

Higher ROCE

Strategic

-based on the business model

location production overseas

core activities versus outsourced

Tactical

-focused on the detailed function

choice of suppliers

approach to stock holding

Eliminating waste and avoiding(lean production)

Simplifying processes and procedures

Outsourcing non-core activities(e.g. transaction processing, payroll, call handling)

Negotiating better pricing with suppliers

Pruning product ranges and costumer accounts to eliminate unprofitable business

Using the most effective methods of training and recruitment

Introducing flexible working practices

Aggressive control of overheads(e.g. banning first/business class travel)

Business left with insufficient capacity to

handle unexpected or short-term increases in

demand

Cost reductions by one department may

surprise and /or annoy other functions if

they are not properly communicated and

coordinated

A profit center is separately-identifiable

part of a business for which it is possible to

identify revenues and cost (i.e. calculate

profit)