Profit Maximization Not Only Proves Your Ability But Also Future of Your Company

Profit maximization is your main goal when you are managing finances of your business. The model of profit maximization is the means by which you increase your profits.  The driving force behind your decision making is the desire to maximize your profits to their highest levels.  Therefore, when making decisions, you must consider the impact they have on profitability.  

Profit Maximization Rules

You may ask yourself two main questions when considering profit maximization.  The first question is: Should we shut down any operations?  In other words, should we be producing?  If production is profitable, you ask the second question: What is the ideal output? In other words, at which level of output are profits maximized? 

The minimum adequate price of your product must at least be equal to the variable cost per unit.  If the price is less than the variable cost per unit, then you would do well to shut down operations completely.  Therefore, the first rule of profit maximization states that a business will only produce if total revenue is equal to or greater than its total variable cost.  This is called the shut-down rule, and provides the guideline for when a business should begin production again. 

The second rule states that if a business is producing, it will produce at its highest levels of output in order to maximize profit.  In other words, you want to maintain levels where marginal cost is equal to marginal revenue.  If marginal revenue is greater than marginal cost, you have to produce more because marginal profit is positive.  At this point, producing any extra would add more to your revenue than your cost.  This results in a loss of potential profit.  On the flip side of that, if marginal cost is greater than marginal revenue, marginal profit is negative.  This results in greater cost savings than loss of revenue.  In this case, you would decrease the amount of production.  For this reason, you would produce neither more nor less when marginal revenue is equal to marginal cost.  This is called the marginalist rule.

Key Points of Profit Maximization

Profit Maximization

There are a few areas you want to remain focused on when considering the profit maximization.  For one, it is necessary to review your expenses often.  Overhead accounts for a huge portion of your expenses.  You should consider your overhead expenses carefully in order to cut costs wherever possible.  You should analyze your cost structure on a regular basis, as well.  You want to ensure you have an adequate markup on your products.  You want to reflect the increase in the cost of materials by increasing the cost of your product.  For this reason, it is important to keep track of rising costs in order to mark up your product slowly. 

 If the price of your product jumps too high at once, you will risk losing valuable customers.  Another thing you want to consider is the motivation of your employees.  When employees are cheerful, they produce higher quality work in a shorter amount of time.  Many companies benefit from implementing motivational techniques such as employee of the month, rewards for employee with highest output over a specified period, company outings or picnics that include family members, etc.  Remember to maintain a pleasant atmosphere.  Keep the goals you set reasonable in order to prevent low morale.  All of these key points are vital to profit maximization.   

Why it is Important?

You will do well to implement the profit maximization model within your decision making strategies.  It is clear that your business depends on profits for its economic survival, so it follows that you want to gain the highest profits possible.  Profit ratings are the true criterion for the ability of your business to survive.  Rising profits demonstrate your competent use and distribution of resources, and ensure the viability of your business in today’s economy.   

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