Company A is a producer of widgets in a monopolistically competitive market structure. It is projected that as more widgets are sold, Company A must offer a discount on each one to ensure adequate demand. Due to limited supplies and the cost of equipment maintenance the cost will rise as more widgets are produced. Revenue and cost at different output levels for the year: Task A. Profit Maximization Profit maximization is a process used to determine which combination of product price and output level will yield the greatest profit. There are two approaches commonly used in profit maximization. total revenue to Total Cost
This first approach takes our total revenue, or all of the sales of our widgets, and subtracts the total cost and focuses on maximizing the difference. The total revenue or TR may be calculated by multiplying the price by the quantity sold. The total cost includes all of the fixed costs plus the variable costs. This covers the cost of all factors in the production of the widgets. marginal revenue to marginal cost This alternate approach to profit maximization involves subtracting the marginal cost or MC from the marginal revenue or MR. The goal here is to find the intersection of MR and MC. The maximum total profit would be where MR = MC.
The Term Paper on Cost Centres, Profit Centres, Investment Centres
The increasing complexity of today’s business environment makes it virtually impossible for most firms to be controlled centrally. Decentralisation is a necessary response to this increasing complexity and involves the delegation of decision-making responsibility by senior management to sub-ordinates. The structure is such that decision making is dispersed to various units within the organisation, ...
Marginal revenue is the increase in revenue from one additional unit of output. This is calculated by dividing the change in the total revenue by the change in the quantity, which is typically 1. Previously I had mentioned that the total revenue can be found by multiplying the price and quantity. Task B. Calculating Marginal Revenue Marginal revenue is calculated by dividing the change in total revenue by the change in quantity. MR = ? TR ? ?q where ? q is typically 1. Marginal Revenue analysis of Company A As charted on the first page, with each additional widget that company A produces the MR will decrease by $10.
Task C. Calculating Marginal Cost Marginal cost is calculated by dividing the change total cost by the change in quantity. MC = ? TC ? ?q where ? q is typically 1. Marginal Cost analysis of Company A As charted on the first page, with each additional widget the company A produces the MC will increase by $10. There is one exception; however, the MC will remain constant between 1 and 2 widgets produced. This is because of a TC reported at quantity 0 of $10. 00, which may be opportunity cost or a start-up cost. Task D. Profit Maximization of Company A Profit maximization will occur at 8 widgets of output.
At this point Company A will realize total revenue of $920, a total cost of $380, and it is here that the marginal revenue and marginal cost will intersect at $80. Task E. Action to Take – MR > MC Per the charted data on the first page, if the marginal revenue is greater than the marginal cost, then Company A should produce more widgets to maximize profits. Task F. Action to Take – MC > MR Per the charted data on the first page, if the marginal cost is greater than the marginal revenue, then Company A is producing too many widgets. Company A needs to decrease widget production until MR and MC are equivalent in order to maximize their profits.
