Each company seeks to maximize profits. It represents the difference between all comprehensive income and costs. Although the main goal of a commercial company is to maximize profits, there are periods when the company operates at a loss.
Net income is one of the main performance indicators of the organization. Profit performs the following functions:
- Shows the financial results of the company, including its cash accumulation;
- is the main source from which the cost of social development and production is paid;
- tax is paid from this amount, which the company pays to the state treasury.
In connection with the rapid development of market relations, the very concept of profit becomes more diverse. In Soviet times, it came down to the fact that costs were simply deducted from revenues. This corresponds to the definition in the lexicon of accountants. Now it is considered from the economic side. Due to this, in addition to the definition of “income and expenses”, the following appeared: “total income”, “average income”, “marginal income”, “zero economic profit”, “normal profit”, “profit maximization”.
Let's consider the last concept in more detail. Profit maximization occurs with the correct use of external and internal factors. The basic requirement is that the income received from each unit of production must be high. At the same time, the amount of marriage must be minimized. That is, the company is trying to make the largest possible difference between income and costs. If a company increases the number of manufactured products, then there is a simultaneous increase in costs and income. In this case, the financiers of the company must ensure that profits exceed marginal costs. While this is happening, the company can continue to increase production volumes. But with the onset of the moment when costs become more than income, production should be suspended, as the company begins to operate at a loss. That is, profit reaches its peak when costs become equal to sales.
Consider the situations that usually occur in the company, and whether profit maximization is observed in a monopoly:
1. A company works efficiently if it produces products in such a volume that costs are significantly lower than total revenue.
2. The company receives high profits when the difference between total revenues and expenses is greatest. Maximizing the profits of the enterprise is the main goal under these conditions.
3. When total costs exceed total revenue, the company incurs losses. But it should be borne in mind that even in this situation, the company can continue production, since in this case the losses are less than those that arise when the activity is completely suspended. If the company covers variable costs, as well as part of the constant, then it needs to continue to produce products. The volume of production at which total costs are only slightly higher than total revenue means that the company receives minimal losses.
4. If the company in the production of products receives equal amounts of costs and profits, then it works with zero profitability. That is, the company does not receive income, but also does not incur losses.
5. An organization may suspend production if, for a certain amount, the losses it incurs are equal to fixed costs.
In the event that the costs significantly exceed the variable and
fixed costs, the company needs to close, at least temporarily. To analyze the situation and determine the most profitable product output for the company.