Profit Maximisation

This assignment is an insight about the changes that will be made to Shamrock over a period of three years, as they join ventures with three companies. It will go on to discuss theories that Shamrock will need to put in place in order to cover costs. This essay will highlight theories such as profit maximisation and sales revenue maximisation and give a brief explanation as to their means.

Profit Maximisation

Profit maximisation is defined as ‘The process of obtaining the highest possible level of profit through the production and sale of goods and services'. (Baumol 2000)

Profit maximisation is the traditional approach to what is the objective of the firm. This theory assumes that the owner of the firm, who seeks to maximise personal wealth, controls the company. In order to maximise personal wealth the owner will seek to maximise the profits of the company (Griffiths and Wall 2001).

The profit-maximisation assumption is the guiding principle underlying short-run production by a firm. In particular, it is assumed that firms undertake actions and make the decisions that increase profit. The profit-maximisation assumption is the production counterpart to the utility-maximisation assumption for consumer behaviour.

A good place for Shamrock to begin the effort of profit maximisation is to consider the costs of operating the company and producing goods and services for sale.

This will involve looking at the fixed costs and the variable costs associated with the business. Expenses that are constant and are incurred regardless of the rate of production are generally considered fixed and not likely to be eliminated. Variable expenses are related to the production process and do change over time.

If the managers at Shamrock are looking for ways to obtain the maximum amount of profit possible, they firstly need to find ways to manage fixed costs to best advantage, while also evaluating variable costs to determine if they are still important to the operation.

In order for the firm to achieve profit maximisation, they need to know the cost and revenue conditions in the market so that marginal revenue and marginal cost can be found. The firm is unlikely to know its demand curve, and it is therefore impossible to obtain a marginal revenue curve. The main problem with maximising profits is therefore the lack of information (Sloman 2000).

WHY SHAMROCK SHOULD USE THIS;

The management team at Shamrock could use the system of profit maximisation as an essential tool for the establishment of their business. There are many strategies in place that will increase the profit maximisation for the company such as focusing on calculating cash flow effectively, using cash flow charts as a method to track inputs and outputs for the business and also optimising their cash flows effectively.

There are many techniques that Shamrock could use to effectively improve their cash flow such as:

Ensuring that the sales plan is current and accurately reflects the market conditions and Shamrocks business capabilities. The sales plan will ‘feed' Shamrocks cash flow projection, and will be built with profit maximization in mind.

They could consider consolidating the other suppliers for a better price and/or better payment terms.

If Shamrock starts developing programs with the other three companies they will be able to save money and also get better service and negotiated payment terms. Profit maximization can be accomplished one step at a time.

Shamrock should understand how to maximise profit by analysing profitability ratios such as accounting profit margin, net profit margin, operating profit margin, and gross profit margin.

The advantages of collaborating a joint venture with the other three companies for Shamrock will be factors such as there will be less money needed to be contributing from Shamrocks sales towards the research such as marketing and promoting the business as the other companies will also be funding.

Sales Revenue Maximisation

According to Baumol (1959), every business firm aims at maximisation it sales revenue. Hence his hypothesis has come to be known as sales maximisation theory & revenue maximisation theory. According to Baumol, sales have become an end by themselves and accordingly sales maximisation has become the ultimate objective of the firm. Hence, the management of a firm directs