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 and cost. Marginal revenue is the extra funds that come from selling another product, which can be determined by the difference in the total revenue by selling one unit of product. by According to the scenario, Company A increases production and sales from 3 units to 4 units, the total revenue increases from $420.00 to $540.00, an increase of $120.00. As such the marginal revenue of producing the 5th widget is $110.00. In this scenario the marginal revenue of producing one more widget decreases because it costs more to produce one more level of output.
Conversely, a firm should also be familiar with the concept of marginal cost which correlates to total cost. “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 total cost and quantity (McConnell, 2012, p.148).” In accordance with the given scenario of Company A, the marginal cost of 3 units of output is 30. The scenario shows marginal costs increasing. As the demand for more widgets increases the company wants to produce more, therefore new investments, such as labor and equipment, are needed for the additional production.
Following the scenario, the profit maximization occurred when 8 units were produced. The total revenue for the production...