Profit maximization is simply the process of fixing the prices and deciding the total output levels in such a way that maximum profits could be generated. The concept of profit maximization can be touched from various angles.
According t financial experts, we can account the figure of profit simply by subtracting total cost from total revenue generated by an organization over a particular period of time. This method of calculating “Net profit” is called Revenue-Cost method. Another method of calculating “net profit” is Marginal Revenue- Marginal Cost method. According to this method, profit in a non-monopolized and competitive market reach to the maximum point when marginal revenue becomes equal to the marginal cost.
Two main categories of costs incurred by an organization are fixed cost and variable cost. Fixed cost is the cost incurred by an organization even when there is no production or output. Examples of the fixed costs are maintenance charges, wages, upkeep charges, rents etc. On the other hand variable cost is the one that vary with the change in production or output. Variable cost keeps on increasing with increase in production. But the game is to rationalize this increase in such a way that large profit margins could be generated.
The sum total of these two costs gives out the total cost of an organization. We can define marginal cost as the cost incurred due to increase in output.
Profit Maximization Vs Optimization of Profit
Profit maximization is simply a process of doing all the efforts to achieve the maximum profit from all business operations. This can be achieved by widening the margins of profit, selecting beneficial investments, utilizing inexpensive sources of finance and by achieving the economies of scale and growth.
Profit optimization is a process of achieving the profits from right places. For example- if some firm decides to go for retrenchments simply to reduce the manpower cost, with an ultimate aim of more profit; then it is not profit optimization, it is simply an activity of profit maximization. This type of maximizations eventually leads to loss in business because profit is not coming from right activities and right places.
Profit of a firm can simply be termed as optimized profit if it is coming from rational operations. So, profit optimization is a process of cutting down the unnecessary or avoidable costs of production. It is extremely different from the concept of profit maximization. In profit optimization a firm that is already running in the profits, look forward to further optimize and rationalize its profit so as to win the global competition. Cost cutting is most powerful tool of profit optimization. But, in the greed of cutting costs one should always take care about mandatory and required costs, because such costs are not only costs they are just like investments for any organization whose benefits can be enjoyed over a long run. So, cost cutting is extremely helpful tool if used with proper care and concern for the growth of organization.