Contact Us
Sign In / Sign Up for FREE
Go to advanced search...

Costs, Revenues and Production Decisions - Essay Example

Comments (0) Cite this document
Costs, Revenues and Production Decisions Introduction A firm’s production decision is critically dependent upon its revenue and costs. In particular, the firm’s objective is to maximize its profits. This involves identifying the level of output that maximizes its profits…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER93.8% of users find it useful
Costs, Revenues and Production Decisions
Read Text Preview

Extract of sample "Costs, Revenues and Production Decisions"

Costs, Revenues and Production Decisions Introduction A firm’s production decision is critically dependent upon its revenue and costs. In particular, the firm’s objective is to maximize its profits. This involves identifying the level of output that maximizes its profits. The profits of a firm in essence are the total revenue net of total costs. Both these variables, total revenues and total costs depend upon the level of output produced. Additionally, the price charged per unit of the product influences the total revenue. Therefore, whenever a firm tries to maximize its profits, it is trying to identify the level of output and the price per unit to be charged so that the revenue is maximized and the costs are minimized so that profits are maximized. In the following, this paper shall elaborate upon how cost curves and revenues play into the production decisions. The discussion will initiate by reviewing the notions of costs and revenues and how these are related to the production decision of the firm. Then the discussion shall move on to show how considerations of costs and revenues impact the production decision. Finally, the paper will conclude with a summary of the findings. Costs and output The primary decision that a producer has to take is to choose its input mix. Each possible input combination given the factor prices, is associated with a particular cost. The firm’s challenge is to identify the combination of inputs that is most efficient, i.e., the combination of inputs that yields the maximum output at some given level of cost, or for some given level of output the efficient input combination minimizes the total cost. Thus, the least cost combination of inputs is known as efficient. Production in the short run involves some fixed costs, i.e., costs that do not depend upon the level of output as well as variable costs, i.e., costs that vary with the level of output. The efficient combination of inputs minimizes these variable costs. To keep things simple typically only two factors of production, capital (K) and Labour (L), are assumed. Capital is assumed to be fixed in the short run and the variable costs are due to varying labour input. Due to the law of variable proportions, the productivity of labour initially increases and then after a certain extent decreases. As a result, the amount of labour required to produce an additional unit of output first falls at a declining rate, slows down and then starts rising at a rising rate. Hence the total variable cost curve is shaped like a tilted “s”. The fixed cost is simply a horizontal straight line and adding these two, the firm’s total cost curve is obtained. It is shown in the diagram below. Figure 1: Variable, Fixed and Total Costs Revenue and output A firm’s total revenue is simple equal to the number of units sold times the price of the product. If P be the per-unit price and q be the number of units sold, then the total revenue (TR) is simply pq. Now, quantity of output, q has two channels of affecting the revenue. First, if q rises, given p, total revenue rises. However, as q rises, by the law of demand, the market price, p falls. Therefore, TR tends to drop. Whether a price change results in a rise or fall in total revenue actually depends upon the price elasticity of demand of that product. However, that topic is beyond the scope of the present discussion. We proceed by making the simplifying assumption that the producer operates in a competitive market so that the market price does not depend upon changes in q (recall that a perfectly competitive producer is a price taker). Thus, with given p, total revenue becomes proportional to quantity of output and therefore can be represented by a straight line with a positive slope and zero intercept. Figure 2: The total revenue curve The production decision As briefly mentioned in the introduction, the producer’s objective is to maximize its profits, i.e., the difference between total revenue and total costs. The discussion above implies that this boils down to identifying the level of output that leads to the biggest gap between total revenue and total costs. The analysis is carried out graphically in figure 3. Observe that initially, as output starts rising, total costs lie above total revenue. Therefore in this phase the producer makes losses. As he increases production, TR rises, and the increased productivity leads to a drop in per unit costs. Consequently, the losses start falling, come down to zero, and then profits start becoming positive. Evidently, the profits are maximized at the level of output where the vertical distance between TR and TC is maximum, and this happens for the level of output where the slopes of these curves are equal. Since the slopes represent the marginals, the profit maximizing output is thus identified by the condition: Marginal Revenue = Marginal Cost or MR=MC. For all output levels where MR>MC, the firm can expand production and increase its profits. For all output levels when MR Read More
Cite this document
  • APA
  • MLA
(“Costs, Revenues and Production Decisions Essay Example | Topics and Well Written Essays - 750 words”, n.d.)
Costs, Revenues and Production Decisions Essay Example | Topics and Well Written Essays - 750 words. Retrieved from
(Costs, Revenues and Production Decisions Essay Example | Topics and Well Written Essays - 750 Words)
Costs, Revenues and Production Decisions Essay Example | Topics and Well Written Essays - 750 Words.
“Costs, Revenues and Production Decisions Essay Example | Topics and Well Written Essays - 750 Words”, n.d.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document

CHECK THESE SAMPLES OF Costs, Revenues and Production Decisions

Decision Making For Management - Linearity of Variable Costs within the Relevant Range

Keeping aside the fixed costs which have to be borne irrespective of the sales revenue, the remaining costs which are directly proportional to units sold can be minimized to manage cash flows in a better way. They can cut on their variable costs by having a look at the contribution margins of their company and their products.

The contribution of sales to before-tax profits, or gross profits, over and above the break-even is exactly the contribution margin as there are no fixed costs any more. The amount after the deduction of variable costs from the revenues will be added to the profits.

CVP graphs help the manager and the reader to have a better figure of the relationship between the profits, sales and volum...
7 Pages (1750 words) Assignment

Marketing, Financial and Production Analysis of Vail Resorts

Finally, in 1966, the town of Vail was established. By 1985, George Gillett purchased Vail Associates and high-speed quad chairlifts were established to help the skiers get to higher elevations on the mountain. In 1992 Apollo Partners purchased Vail Associates, which in turn became Vail Resorts Inc., which was followed by the acquisition of ski resorts Keystone and Breckenridge. The acquisition of these ski resorts was a major change that helped Vail succeed in the long run by appealing to a broader market. Both Keystone and Breckenridge have lower prices than Vail Mountain and attract more single- and college-aged customers (Vail Resorts).

The company then added the Real Estate segment which comprised 6 percent of the...
9 Pages (2250 words) Case Study

Costs, Benefits and Risks of MerloniS Current Distribution System

Each supply-chain risk to forecasts, information systems, intellectual property, procurement, inventory, and capacity has its own drivers and effective mitigation strategies. To avoid lost sales, increased costs or both, managers need to tailor proven risk-reduction strategies to their organizations.” (Sodhi)

Distribution systems play an important role in the overall functioning of the supply chain management system of an organization. Any good distribution system requires that all the associated activities are coordinated in such a way that they facilitate the whole flow of organizational resources from one point to another. This is important because of the fact that a swift and smooth flow of organizational reso...
10 Pages (2500 words) Case Study

Global Warming and Food Production

The carbon fertilization effect of increased carbon dioxide concentration in the atmosphere has an impact on plant growth, which benefits plant growth by facilitating photosynthesis, cannot balance the complex impact of increased temperatures around the world. Thus, although some regions will benefit from global warming, a total reduction in global agricultural production will result. This essay presents a discussion about the impact of global warming on agriculture and food production around the world.
Although the history of the planet earth suggests that for the last million years ice ages have been interspersed with warmer periods, evidence suggests that the average rate of global warming within the recent past has accele...
14 Pages (3500 words) Assignment

Production of Lustre Painted Ceramics During the Fatimid Period

Glazed ceramics represent a very small percentage of the total ceramic production during the medieval Muslim world. The majority of domestic earthenware comprised unglazed storage and transport jars for items such as grain, oil and water, and unglazed bowls, platters and receptacles, which were made for the kitchens, pharmacy or the market shop. However, glazed and painted ceramics were highly sought commodities in urban as well as courtly settings2.

Medieval sources refer to pottery or ceramics as Khazar, fakhkhar, and chadar, and the generic term sini is used particularly for fine glazed ceramics. The term sini is derived from the Arabic word for China – al-Sin – since both potters and consumers of the med...
10 Pages (2500 words) Case Study

Female Gender in a Production of The Country Wife

...How would a Restoration Comedy Production Stage Female Gender in a production of The Country Wife? The proliferation of restoration comedies symbolised the English renaissance, marking the liberation from puritanical censorship of public stage performances towards the increased sexuality and prurience in plays through satirised depictions of marital relationships and society. This in turn marked an important change in the portrayal of female gender. Indeed, Copeland highlights the point that: “gender roles and their lengthy production histories were central components of the comedies and their pre-twentieth century history. They were staged during a time of dramatically changing gender roles and lengthy production histories subsequently...
23 Pages (5750 words) Assignment

Drug Abuse Costs

... the costs, both covert and explicit, that accompanies addiction in terms of decreased productivity and unemployment, future healthcare costs, and increased demands on the criminal justice and social services systems. Alternately, cost-effectiveness analyses “compare two or more treatments by determining the cost of a given desirable outcome using each treatment” (Langenbucher, 1996, p. 2). A disclaimer however on this framework: Langenbucher’s analysis also compares the cost of treatment to the benefits that accrue, that is, the success that can be measured after the treatment. While there is a general consensus that successful treatment is economically viable when compared to the costs of continued addiction, there is little consensus...
6 Pages (1500 words) Term Paper

Production of Monoclonal Antibodies

Though it was Paul Ehrlich who proposed about monoclonal antibodies as early as the beginning of 20th century, it was in1975, that Kohler and Milstein combined the unlimited growth potential of myeloma cells with the predetermined antibody specificity of normal immune spleen cells to produce monoclonal antibodies (Kimball, 2007). In this essay, the production of monoclonal antibodies for the diagnostic and therapeutic purpose will be discussed with reference to Molecule A secreted by leukemic cells.
To produce monoclonal antibodies for medical use, the vertebrate, usually a mouse, is challenged many times with molecule-A against which monoclonal antibodies are to be produced. After this, from the principal organs for B cell...
6 Pages (1500 words) Coursework

Impacts of Climate Change on Food Production over the Next 50 Years

... agricultural innovations present in the developing countries are focused on the integrating technology and farm decision in issues related to conservation of water and soil, fertilizers and improved types of seed, and this result to impacts on the yield in agricultural sector. There are expectations of facing numerous challenges in the agricultural sectors due to the growth in the global populations, degradations of land and urbanizations, which is contributing to loss of farming land (United Nations, 2007, 3). Nevertheless, the production of food over the past years have kept a pace with a population in the world, though there have been some cases of regional deficits and deficiencies associated with nutrition. Therefore, the changes...
6 Pages (1500 words) Term Paper

Production of Knowledge

...Production of knowledge Introduction Knowledge refers to the awareness or understanding that one develops with his or her environment. Ever since time immemorial, humans have always wanted to understand their environment and the people living around them. The desire to understand the environment motivates human to investigate and question the existing facts around the same. This enhances the growth of knowledge since investigation reveals intricate features about the environment and the things existing in the environment. Education and experience are the most cost effective ways of acquiring knowledge1. The two processes entail a series of experiments and observations of the various features of the environment. This validates the argument...
7 Pages (1750 words) Assignment
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Let us find you another Essay on topic Costs, Revenues and Production Decisions for FREE!

Contact Us