3.2.1 Business Objectives Flashcards
What are some Different Business Objectives and Reasons for Them?
- Profit Maximization: i.e., to earn the highest possible level of net income.
Reasons:
Provides a financial return to the owners/shareholders.
Attracts investors and capital.
Indicates efficient resource allocation and cost control.
Often a primary goal for profit-driven organizations. - Revenue Maximization: from the sale of goods or services.
Reasons:
Focuses on increasing market share and capturing a larger customer base.
May be used when a company wants to establish its presence in the market quickly.
Can lead to higher long-term profits if accompanied by cost control. - Sales Maximization: maximize the number of units sold, regardless of profit.
Reasons:
Common in industries where competition is intense, and market share is crucial.
May be used to maintain a dominant market position.
Can be a strategic choice to deter new entrants. - Satisficing: To achieve a satisfactory rather than maximum level of profit or performance.
Reasons:
May prioritize other goals, such as employee satisfaction, social responsibility, or long-term sustainability.
Reduces the pressure to continually push for higher profits.
How would profit maximisation be calculated and illustrated on a diagram?
Formula: Profit (π) = Total Revenue (TR) - Total Cost (TC)
Diagram: The profit maximization point occurs where the marginal cost (MC) equals the marginal revenue (MR). MC = MR.
How would sales maximisation be calculated and illustrated on a diagram?
Formula: Sales (Q) = Market Demand (D) or a company’s own production capacity.
Diagram: This objective focuses on increasing the quantity sold, so the company aims to produce or sell as much as possible within the limits of market demand or capacity.
Sales maximised when average revenue = average cost
How would revenue maximisation be calculated and illustrated on a diagram?
Formula: Total Revenue (TR) = Price (P) x Quantity Sold (Q)
Revenue is maximised when marginal revenue = zero
