During week two of ECO/561, our team has studied identifying production levels to maximize profits for an organization or business. The team has also studied how to balance fixed and variable costs and how to apply economic cost concepts in making business decisions. Throughout the reading and discussions, each team member has different areas in which he or she struggled, felt confident, and related to the field he or she works in.
Identify production level to maximize profits. When developing a business plan, the company or organization must ensure the plan includes the correct production level to meet the costs so the company can maximize the profits. When attempting to develop a profit, the company must be sure the amount of production is covered by the sales of the product as well as the costs. If the appropriate amount of research is done, then the company can ensure a high profit. Production levels can be used to maximize profits because if production is high, there are more products to sell. If the company has more products to sell, then the company will have an established income hopefully high enough to cover overhead. In a purely competitive market, firms can maximize profits by adjusting the level of output. This is done through the changes in labor and materials (variable resources). In addition, costs are maximized when total revenue is compared to total costs. Marginal revenue and marginal costs are also compared to maximize profits. If a company can produce more units without spending more on resources, they can first break-even and then maximize profits. In an organization, increasing production is one of the keys to increase profit. It is important to improve the line of production in any type of company to a fast and efficient process that can result in growth and success. An organization must consider innovative ways to help employees increase their productivity. With technology, firms can develop new strategies that can make this possible, such as telecommuting positions and advanced computer systems, machines, and/or improved equipment.
Fixed and Variable Costs When discussing how fixed and variable costs can balance one another, the first step is to develop an understanding of what both are. Fixed costs are costs that must be paid even if a firm does not make a profit. These include rental equipment, debts on outstanding loans, and insurance. Variable costs change with the different levels of output. These include payments of fuel, labor, and transportation services. These two different costs can be balanced by the average total cost. By developing an understanding of what the companies’ costs are and what the overhead is, then the company can create a production requirement and sales requirement to cover the costs of production. The fixed costs should be cut to a minimum to allow variances in the variable costs of running the company. If the variable costs become too high then the management or owners of the business need to make decisions accordingly to ensure the costs are lowered to maximize profits. It is important to understand the difference between fixed costs and variable costs. Fixed costs do not vary with changes in output whereas variable costs change with the level of output (McConnell, Brue, & Flynn, 2009). So in the short term, labor is variable and capital is fixed and in the long term, there is no fixed or variable costs since capital and labor can change. So even if production changes, fixed costs don't. On the other hand, variable costs change as production changes. Therefore, organizations must be aware of both the fixed and variable costs of their production to ensure they are spending only on the necessary. As part of the fixed and variable costs of production, an organization must consider opportunity costs.
Apply economic costs in making business decisions.
Economic costs are any costs relevant between the costs and