This theory explains about the equilibrium level of output determination of a firm when the objective of manager is to maximize sales revenue subject to profit constraint. Here the model is also extended for the long run.

1. Managerial goal: baumol’s Theory of sales-revenue
maximization

2. Assumptions
• Managers of large firms are more interested in maximizing in sales
revenue subject to a minimum profit constraint because
1. Widely accepted as an indicator of performance
2. A determinant of power, influence and status earned by the
executives
3. Sales data- a determinant of the lender’s faith

3. Diagrammatic Explanation
• Horizontal Axis represents
output.
• Vertical Axis represent monetary
variables (revenue, cost and
profit)
• R(q)- Total Revenue Curve
• C(q)- Total Cost Curve
• Π(q)- profit curve (Vertical
distance between revenue and
cost curves)

4. Explanation
• If the firm is guided by the objective of profit maximization
• 𝑂𝑞∗- equilibrium level of output at which the difference between
revenue and cost is maximum.
• O𝑞3- level of output at which firm maximizes its sales revenue
• The minimum target profit is given by the straight-line parallel to the
horizontal axis
• Hence the maximum level of output that the firm can sale in the
market is −𝑂𝑞 𝑒 (The intersection of target profit and actual profit
curves i.e. targeted minimum profit=actual profit)
• Here we can find 𝑂𝑞∗ < 𝑂𝑞 𝑒 < 𝑂𝑞3

5. Extension of Sales Maximization Model
for Long Run
• Needham: Current Profit- important source of finance to expand firm
• Expansion is required for increase in sales revenue in LR*
• While planning for longer time horizon managers might not choose to produce
more than profit maximizing level of output.
The present value of sales revenue for time period 𝑛 can be expressed as 𝑃𝑉 =
𝑅0(1+𝑔)
1+𝑟
+
𝑅1(1+𝑔)2
(1+𝑟)2 + ⋯ +
𝑅 𝑛(1+𝑔) 𝑛
(1+𝑟) 𝑛
PV= present value of future revenue, 𝑔 = growth rate of the firm
𝑅𝑖= Sales revenue of 𝑖th period (¥ 𝑖= 1,2,….., 𝑛)
𝑟 = rate of discount to convert future value into present

6. Continued ….
• Hence, it can be said
1. Maximizing current profit the firm can maximize the value of future
growth rate
2. While a firm goes for maximizing sales revenue in current period it
is indirectly sacrificing future growth rate and hence future sales
revenue
3. There arises a trade-off between current sales revenue and future
sales revenue and the managers have to choose the optimal trade
off
4. In short run the profit constraint is exogenous and in long run the
optimal trade off between current sales revenue and future growth
rate determines the profit constraint.