Profit Maximization

It's a Fine Balance to Achieve The Max!

A business can use one of two methods to decide its best price and output levels.

The first approach is simple.

Subtract the total cost of producing the items from the total amount of revenue received from the sale.

The second method is more complicated and uses the marginal revenue and marginal cost of producing a product to arrive at the profit level.

Marginal revenues and costs change depending on the number of units produced, with the cost per unit generally decreasing as production increases.

The profit level is zero if the marginal revenue and marginal cost are equal.

A positive profit occurs if the marginal revenue is more than the marginal cost, and a negative profit is the result of the marginal revenue being less than the marginal cost.

This second method is typically used if the total revenue and total cost cannot be accurately determined.

Fixed Costs v Variable Costs.

Fixed costs are costs that remain constant month after month, with changes usually occurring on a set schedule, such as once a year.

Equipment leases, cleaning services, insurances, and rent are examples of fixed costs.

Variable costs fluctuate according to the amount of production or output for a particular period of time.

An increase in output will most likely result in higher variable costs, due to higher production costs, raw material, wages, etc.

Pricing Means More Than Just Price.

Pricing a product or service to achieve profit maximization requires the consideration of several factors.

One of these factors is the marketing position of the product or service.

The expectations of the customer, whether that is a low, middle range, or high price will influence how well a marketed item will sell.

A price that is too low may lead the customer to conclude that the product or service is of low quality, and a price that is too high can well result in a customer looking elsewhere.

Market Demand.

With a little bit of undercover marketing intelligence you can find out what price your customers are willing to pay for your products or services as well as the price range that will attract the largest percentage of customers.

A product considered a good deal and reasonably priced can result in an increase in demand for the product or service.

The fixed and variable costs of a product or service need to be carefully estimated. Profits can only be realized if prices are set at a high enough level to cover purchase cost, production cost & overheads.

There may need to be several pricing adjustments before profit maximization if reached.

Modern Net-Wit:

"If it's the Psychic Network, why do they need a phone number?""

..................................................................Robin Williams


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