Cost, Revenue, and Profit Maximization

Measures of Cost There are several ways businesses measure costs. Fixed Costs – costs that do not change with the change in level of production, also call overhead Variable Cost – costs that change with the change in level of production

Measures of Cost

Measures of Cost Total Cost – sum of the fixed and variable costs Marginal Cost – extra cost of producing one additional unit of production.

Measures of Cost Marginal Cost

Applying Cost Principles Fixed and Variable costs affect how a business operates. Many firms are turning to e-commerce because Overhead costs are low There is a low need for inventory

Applying Cost Principles After businesses measure their costs, they determine the break-even point, the point at which costs equal revenues Businesses wanting to do better than break-even apply principles of marginal analysis to their costs and revenues.

Marginal Analysis and Profit Maximization Two key measures of revenue are used to find the amount of output that will produce the greatest profits: Total Revenue – total amount earned by a firm from the sale of its products

Marginal Analysis and Profit Maximization Marginal Revenue – extra revenue from the sale of one additional unit of output

Marginal Analysis and Profit Maximization Total Profit – is found when you subtract total cost from total revenue.

Marginal Analysis and Profit Maximization

Marginal Analysis and Profit Maximization Marginal Analysis – a type of decision making that compares the extra benefits of an action to the extra costs of taking the action. Profit Maximization is reached when marginal cost and marginal revenue are equal

Marginal Analysis and Profit Maximization