EGT TASK1a Essays

Submitted By cshipp
Words: 535
Pages: 3

One of the most important objectives of any business is profit maximization. The concept aids in the survival of the business, guarantees an increase in the return of its shareholders, and also prevents insolvency from occurring. In order for a business to understand profit maximization it must first comprehend the relationship between marginal revenue and cost. For a company to properly understand marginal revenue and cost, it would have to determine how it is related to total revenue (TR) and total cost (TC). The TR is the total amount of money that a firm gets from, selling their products; the calculation to determine total revenue is TR=price X quantity. Total revenue is not considered profit though. Profit is actually total revenue minus total cost (profit=TR-TC). According to the scenario of the chart below, Company A increases production and sales from 7 units to 8 units, the total revenue shows no increase. Total Revenue to Total Cost is cost, therefore following the scenario, the profit maximization occurred when 8 units were produced. The total revenue for the production of 8 units was $920.00, the total cost of producing those units was $380.00. If Company A continued increasing their level of output, ultimately costs would increase as well. Instead of looking for the largest difference between revenue and cost, now the purpose is to find when these two aspects of marginal analysis are equal. Marginal revenue to Marginal Cost is equal; MR=MC. Marginal revenue is the change in extra funds from increasing quantity of widgets by one unit, which can be determined by the difference in the total revenue by dividing it by the change in quantities of widgets (MR = ΔTR (difference of two revenues at the same output level)/Δq (will always equal 1)) For example, the total revenue for producing 2 widgets is $290.00 is 140. “Marginal cost is the extra costs incurred in order to produce one more unit or product (McConnell, 2012, p. 150).” A company cannot determine the marginal costs unless if the total costs are available. When adding fixed costs and variable costs the end result is total costs. From there the marginal cost is found by dividing the change in…