Alternative objectives: revenue, growth, managerial utility, satisficing and the environment

Overview

Mean for a firm to pursue sales revenue maximisation, managers want to maximise sales revenue rather than profit and mean for a firm to pursue sales volume maximisation.

What you need to know

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Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What does it mean for a firm to pursue sales revenue maximisation, and at what output does it occur?

   Model answer

   Sales revenue maximisation means choosing the output that makes total revenue as large as possible, regardless of the effect on profit. It occurs where marginal revenue is zero, because up to that point each extra unit adds to revenue and beyond it each extra unit subtracts from revenue. This is also the output at which demand is unit elastic.

2. 2

   A firm faces P = 100 − 2Q with TC = 30 + 10Q + Q squared, and its shareholders insist on a profit of at least £570. Calculate the largest output the firm can produce while meeting that constraint, and compare it with the revenue-maximising output.

   Model answer

   Total revenue is PQ = 100Q − 2Q², so profit is 100Q − 2Q² − 30 − 10Q − Q² = −3Q² + 90Q − 30. Setting profit equal to 570 gives 3Q² − 90Q + 600 = 0, or Q² − 30Q + 200 = 0, which factorises to (Q − 10)(Q − 20) = 0. Profit reaches £570 at 10 units and again at 20 units and exceeds it between them, so the largest output consistent with the constraint is 20 units. Price is 100 − 2(20) = £60 and revenue is £1,200. The unconstrained revenue-maximising output is 25 units, where marginal revenue of 100 − 4Q is zero, giving a price of £50, revenue of £1,250 and profit of only £345. The constraint therefore pulls the firm back from 25 units to 20, giving up £50 of revenue to gain £225 of profit, which is exactly the trade-off a minimum profit constraint exists to force.

3. 3

   What would a diagram showing the difference between profit maximisation and sales revenue maximisation look like?

   Model answer

   Put output on the horizontal axis and price, revenue and cost per unit on the vertical axis, then draw a downward-sloping average revenue curve, a marginal revenue curve twice as steep, average total cost and marginal cost. Profit maximisation is directly below where marginal cost cuts marginal revenue, while revenue maximisation is directly below where marginal revenue cuts the horizontal axis, which is further to the right. Reading both outputs up to the average revenue curve shows that the revenue maximiser charges the lower price and sells the larger quantity.

4. 4

   Why might managers want to maximise sales revenue rather than profit?

   Model answer

   Managerial salaries, bonuses and status are often linked more closely to turnover and the size of the operation than to profit. High and growing sales make the firm look successful to banks, suppliers and prospective employees, easing access to credit and talent. Large sales volumes also give the firm bargaining power over suppliers and may deter entry, which protects the manager's position.

5. 5

   Why is sales revenue maximisation usually described as subject to a minimum profit constraint?

   Model answer

   Managers who drove profit down to nothing would face shareholder revolt, a falling share price and the threat of takeover or dismissal. In practice they must deliver enough profit to keep owners content and to fund essential investment, and only then push revenue as far as possible. The chosen output therefore lies between the profit-maximising output and the unconstrained revenue-maximising output.

6. 6

   What does it mean for a firm to pursue sales volume maximisation, and how does this differ from sales revenue maximisation?

   Model answer

   Sales volume maximisation means selling the largest possible number of units, whereas revenue maximisation means earning the largest possible pounds of turnover. Because revenue is price multiplied by quantity, a volume maximiser will push output beyond the point where marginal revenue is zero, cutting price into the inelastic region of demand and reducing total revenue. A volume maximiser is normally constrained by the need to earn at least normal profit, so it expands until total revenue just covers total cost.

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