Essay about Marginal Cost

Submitted By jeni1978
Words: 977
Pages: 4

Maximizing Profits


Maximizing Profits
A. Explain profit maximization from the following approaches:
1. Total revenue to total cost
Companies calculate profits by subtracting the total costs from total revenue. For organizations to maximize the total profit, it is required to optimize the difference between the total costs and the total revenues. The practice starts by determining the right quantity of maximizing profits. Companies determine the right price by substituting the amount against the demand equation, or else, they can determine price by driving the revenue by the total amount. In a graph, the total revenue curve augments at a decreasing rate, hence making the curve appear flat. It leads to the decrease of the total revenue. The relationship between quantity and the total revenue shows that a monopolist needs to charge lower in prices so as to sell more. A reduced rate causes small increases and eventual decreased total revenue. The relationship also affects price elasticity, explains Beattie, Taylor, & Watts (1985).
2. Marginal revenue to marginal cost
Companies could also use marginal cost and marginal revenue to maximize profits. A business needs to produce continuously more output provided that the unit increases revenue without adding costs. According to Beattie, Taylor, & Watts (1985) the combined income by a new product is called the marginal revenue and any costs incurred due to the new unit are known as the marginal cost. The implication is that businesses should keep producing more up to the point where the marginal revenues are equal to marginal costs. At this stage, the company can claim to have maximized their profits. Marginal revenue is not an easy aspect because the company needs to lower its unit prices so as to sell more. The reduced rates imply that the organization will have less in revenues for all the units. Calculus helps companies calculate both marginal revenue and cost.
B. Explain the calculation used to determine marginal revenue.
1. Discuss how marginal revenue increases, decreases, or remains constant in the given scenario.
Calculating the marginal revenue requires one to compute the total income, which equals the product of price and quantity. For example, if a company sells ten units of an individual product at five dollars each, then the revenue will be ten times five, which is 50 dollars. The company then has to change the revenue during the production of a single unit. Increasing the production by one makes it eleven. The price remains constant, but the total revenue changes to 55dollars. The change in revenue in this scenario is five, obtained by subtracting $50 from $55. Five dollars represent the marginal revenue. When the price is constant for all output levels, the marginal revenue equally remains constant, Beattie, Taylor, & Watts (1985). The next step requires one to consider price reduction and increased sales. If the company reduces the price from $5 to $4, the total revenue becomes $44, and the marginal cost is six dollars. Beyond the price of four dollars, the company will earn no profits from additional production.
C. Explain the calculation used to determine marginal cost.
1. Discuss how marginal cost increases, decreases, or remains constant in the given scenario.
To determine the marginal cost, the accountant should collect all required variables and plot them in a spreadsheet. Marginal costs equal total cost divided by total output. For instance, if the first column of the spreadsheet shows an output of 1,000 for 8, 000 dollars, and the following row have 2,000 in outputs with $12,000 costs, then the formula will be $12,000-$8,000)/(2,000-1,000). The marginal cost is four dollars.
D. Explain where profit-maximization occurs for Company A using the chart provided in the given scenario.
Profit maximization occurs when the marginal revenue is zero and at the