Analysis of Marginal Profit

Analysis of Marginal Profit

Introduction

Business owners, aspiring entrepreneurs, and managers need to know the best form of business group to select based on various considerations, including liability, taxes, capital contributions, profits and losses sharing, control and management, and survivorship. This can be done by the analysis of revenues and cost of the particular business in which one is interested in start. The purpose of writing this paper is to define the concept of marginal revenue and marginal cost and the importance of these terms in maximizing the profit. We will evaluate this concept by the given scenario and related work has been attached in the appendix.

Discussion

Total profit is output of total revenues less total cost. For maximizing the profit the company needs to maximize the difference between cost and revenues. This approach focuses on total revenue and cost for determining the total profit. Whereas the marginal approach of profit maximization is marginal revenue less marginal cost. Marginal profit approach focuses on the trend on each unit sold. The point at which marginal cost equals to marginal revenues is the point at which profit is maximized (Mark, 2011).

Marginal revenue is the ratio of change in revenues to change in quantity sold. The revenue function is “R(q)=P(q).q”. In the given situation, the marginal cost revenue is constantly declining with an increase in every unit sold. When the company increasing its revenue by increasing unit sold the marginal revenue is declining. Marginal cost is the change in total cost due to every extra unit produced. Marginal cost is the cost of producing every extra unit (James et.al, 2011). In the given scenario, marginal cost at quantity zero is $10 that is part of fixed cost. At quantity 1 & 2 marginal cost remained same at $20 and after that with every extra ...