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Cost, Revenue, and Profit Maximization

Cost, Revenue, and Profit Maximization. Businesses must analyze costs before making a decision. Cost is divided into several areas: Fixed Cost – Incurred even if plant is idle and output is zero (salaries, interest, rent, tax, etc.).

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Cost, Revenue, and Profit Maximization

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  1. Cost, Revenue, and Profit Maximization Businesses must analyze costs before making a decision. Cost is divided into several areas: Fixed Cost – Incurred even if plant is idle and output is zero (salaries, interest, rent, tax, etc.). Variable Cost – this changes when the rate of operation or output changes (labor & raw materials). Total Cost – Sum of the Fixed and Variable costs. Marginal Costs – extra cost incurred when a business produces one additional unit of a product (per-unit increase in variable cost).

  2. Cost, Revenue, and Profit Maximization Businesses use Total Revenue and Marginal Revenue to find the amount of output that will produce the greatest profits. Total Revenue – number of units sold X average price per unit *Marginal Revenue – extra revenue associated with the production and sale of one additional unit of output. Determined by dividing the change in Total Revenue by the Marginal Product.

  3. Cost, Revenue, and Profit Maximization Marginal Analysis – compares extra benefits to the extra costs(cost/benefit analysis). If the Marginal Cost is less than the Marginal Revenue, the business will continue to hire. Break-Even Point – total output the business needs to sell in order to cover its total costs. Profit-Maximizing Quantity of Output – Marginal Cost and Marginal Revenue are equal.

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