profit maximization and cost minimization
DESCRIPTION
Profit maximization and Cost Minimization data analysis for Engineering ManagementTRANSCRIPT
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)