Me x -profit

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Me x -profit

  1. 1. Profit• Return to the entrepreneur for the use of hisentrepreneurial ability• Reward for uncertainty bearing• Reward for innovation
  2. 2. Kinds of profit• Earnings of mgt• Monopoly profits exist because of disequilibrium and imperfect competition• Windfall profits—arise due to changes in general price level in mkt—unexpectedly comes in the way, never planned• Profit as a functional reward like wages or salaries, rent—factor of production
  3. 3. Some concepts• Gross profit=total receipts-total explicit cost• Net or pure profit=gross profit-implicit cost• Normal and supernormal profits• Actual profit-normal profit=supernormal profit
  4. 4. Importance of profit• Serves as an index of performance of firm• Premium to cover costs of staying in biz• Ensures supply of reinvestible capital— source of financing future expansion of firm• Guarantees the survival of biz• Profit maximization and profitability maximization—former short run, latter a broader concept
  5. 5. Factors determining short term goals• Life cycle of pdt• Tastes and preferences of consumers• Extent of competition• Biz environment• Selling effort of firm• Fiscal policies
  6. 6. Factors determining long term goals• Growth of firm is of prime importance• Innovation and therefore R & D
  7. 7. Conflict between short run and long run profitability• Firm ignoring after-sales and research, high profit in that year at the cost of long run profits• Firm spending on labour welfare reduce short run profit and contribute to long run profit• To establish goodwill in society, firm ignore short term interest of maximizing profit
  8. 8. Accounting profit and economic profit• Difference between 2 approaches is ignoring opportunity costs—economist deducts implicit costs like wages, interest, rent on self owned building from total revenue receipts• Accounting profit—true profit cannot be determined until ownership of that investment is fully terminated—profit is difference between cash value today and at the end
  9. 9. Profit limiting factors• Internal factors—mgt reluctance to change – Building a reputation initially reduces profits – Preference to liquidity—cash and credit sale• External factors—company’s goodwill – Aiming at entry barrier—to preserve monopoly of its position and to restrict entry, reduced price – To limit demands of trade union—high profit invites demands of high wages
  10. 10. Break even analysis• Level at which cost and revenue are in equilibrium• Break even point• Contribution• PV ratio• Profit planning• Margin of safety
  11. 11. Managerial application of BE concept• Choice of prod process• Estimating profits• Estimating sales volume required to meet proposed exp• Plant expansion decisions• Change in prices and costs and its impact on profits• Choosing a product mix• Make or buy decision

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