cost revenue and profit maximization
Skip this Video
Download Presentation
Cost, Revenue, and Profit Maximization

Loading in 2 Seconds...

play fullscreen
1 / 17

Cost, Revenue, and Profit Maximization - PowerPoint PPT Presentation

  • Uploaded on

Cost, Revenue, and Profit Maximization. Chapter 5, Lesson Five. The Purpose of a Business. What is the purpose of a business? If you are a business owner, what do want? Hopefully you said to make the most money possible. How do we make money?

I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
Download Presentation

PowerPoint Slideshow about 'Cost, Revenue, and Profit Maximization' - tilden

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
the purpose of a business
The Purpose of a Business
  • What is the purpose of a business?
  • If you are a business owner, what do want?
  • Hopefully you said to make the most money possible.
  • How do we make money?
  • We earn more than we spend. There are a few terms that economists use to explain this very simple idea.
  • A business must analyze costs before making decisions.
  • To simplify decision making, cost is divided into several different categories.
  • Fixed cost—cost of business incurs even if the plant is idle and output is zero
    • -In other words, how much it costs you to have the company even if you aren’t producing anything
    • Examples: salaries (not hourly pay), rent, property taxes, car notes
    • Usually associated with machines, equipment, buildings, etc.
  • Variable costs—costs that change when the business rate of operation or output changes
    • Costs that change according to how much you produce
    • Examples: wages (per hour), electricity bill, freight/shipping charges
    • Usually associated with labor and raw materials
  • Total cost (or overhead)—the sum of the variable and fixed costs
  • Marginal Costs—extra cost incurred when a business produces one additional unit of product.
  • MC = difference in total costs / marg. Prod.
    • Fixed costs do not change—marginal cost is the per unit increase in variable costs that stems from using additional factors of production.
revenue makin money
Revenue (Makin’ Money)
  • We want to make more than we spend. We’ve already looked at what we spend (costs), now we need to look at the amount of money we pull in (revenues).
  • Total Revenue—total amount of money that comes into the business

# of units sold multiplied by average price per unit

Or quantity sold multiplied by price per unit

  • Marginal revenue—extra revenue associated with the production and sale of one additional unit of output

MR = difference in total revenue / marg. Prod.

marginal analysis
Marginal Analysis
  • Economists use marginal analysis, a type of cost-benefit decision making that compares the extra benefits to the extra costs of an action.
  • This analysis will show us when we are losing money, when we are making money, and when we are breaking even.
  • Break-even point—total output or total product the business needs to sell in order to cover its total costs.
marginal analysis1
Marginal Analysis
  • A business wants to do more than just cover its costs and break even.
  • It wants to make money! That’s the goal of a business.
  • We want to minimize our costs and maximize our revenues to find the point that will make use the most amount of money
  • Profit—your revenue minus your costs (how much is left over after you pay your bills)
  • Total profit—Total revenue minus total costs
  • The total profit is maximized where marginal costs equal marginal revenue. This is were business should operate to make the most possible money.
  • This is where they are not missing any would be profits and they are not losing any money.