BUSINESS ADMINISTRATION AND MANAGEMENT STUDIES: Sales Revenue Maximization Model is better than Profit Maximization Model

# Is Sales Revenue Maximization Model is better than Profit Maximization Model? Justify.

In order to compare both the models i.e sales maximization model and profit maximization model first we must understand both the models :

Profit Maximization Model:

This is a traditional model of economics which has its prime focus upon profits.

As we know, every nation is governed by economic and non-economic activities. Economic activities are concerned with profits and wealth whereas non-economic activities is concerned with mankind and welfare of the nation.

There are a lot of objectives of the business. Under this model, the main target of the firm is to maximize profits. The firm may have different objectives or combination of these objectives like: Survival, Growth, Stability, Efficiency, Market Share and so on.

As firms were operated mostly under proprietorship business in 18th century, the classical economists believed that the sole objective of any business is profit. They had following assumption :

Time period is fixed.
Single commodity is produced by the firm where the owner himself is the manager of the firm.
There is existence of imperfectly competitive market (like monopoly, monopolistic, oligopoly ).
The firm always wants to maximize profits.

So, the classical economists tried to explain profit maximization model in two simple ways.

They are :

TR-TC Approach:

Under this approach, Profit is defined simply as the difference between total revenue and total cost.

Mathematically,

Profit = TR-TC ,

Note:

TR=TC then it is the break-even level.
TR>TC then the firm derives profit.
TR<TC then the firm suffers loss.

So, the firm will be at equilibrium position where the difference between total revenue and total cost is maximum.

If we represent the facts through graphical representation , it can be found that:

The TR curve slopes upward to the right and bends towards X-axis. This is due to its assumption number 3. That makes TR increase but at decreasing rate.

Similarly, TC curve slopes upward to the right as inverse -S-shaped. This is due to traditional cost concept which explains that TC increases at decreasing rate initially and latter at increasing rate.

If we plot the above information , then we can find that a place where the vertical difference between TR point and TC curve point is maximum, at that level firm is in equilibrium position.

MR-MC Approach:

Under this approach, the firm reaches at equilibrium position if it satisfies the following two condition:

MC=MR
MC cuts MR from below (i.e the slope of MC > the slope of MR)

As per the assumption number 3 , TR increases at diminishing rate as output increases. So, MR decreases continuously as output increases that implies, MR curve slopes downward to the right..

Similarly, as per the traditional cost concept, MC falls initially and then rises later. This is the reason MC curve gets U-shaped.

Sale Revenue Maximization Model

This is the model developed by W.J.Boumol. This model of economics has its prime focus upon sales.

Under this model, the ultimate objective of the firm is to maximize sales (revenue of the firm). Although, the firm needs profit in short run to survive, expand and attract customers, however the ultimate objective of the firm must be maximizing sales in order to survive in long run.

This model is based upon following assumptions:

There is single period time horizon of a firm .
During this period, the firm tries to maximize its total revenue.
The firm realizes a minimum level of profits in order to keep the shareholders happy
Cost curves are U-shaped
Demand curves are downward sloping.
Market is imperfect.

According to Baumol, in the real world, The firms gains more and more profits by maximizing its volume of sales. So, its price and output policies comes nearer towards welfare maximization of the consumers. However, the firms changes its price and output when there is increase in the cost of overhead.

Comparison of the two Models:

Although both the models has been criticized in its own manner it can be analysed that, Baumol model of sales maximization is more acceptable model in compared to profit maximization model, due to following reasons:

A firm with profit maximization as a sole objective considers only that stimulation factors which increases its profit. Therefore, the economic welfare of the society gets hampered. However, a firm operating under sales maximization objective considers upon the volume of sales that is closely connected with welfare of the society.

Most of the financial institution interlinks the performance of the firms on the basis of sales. This means that a firm with greater sales will get greater financial support.

A firm with higher sales means it has huge market coverage. This helps to gain more competitive advantage ( in terms of strength or bargaining power).

A firm with growing sales can meet higher level of expectation of employees.

In short run the firm with profit maximization model can fetch high profits and survive. However, In long run, a firm with sales revenue maximization firms will be able to survive and not the profit maximization firms.

A sales maximizing firms can spend more on advertising and promotional field. However, profit maximizing firms would not like to spend upon these factors ,

It could be easy to meet corporate social responsibility for the firms operating in sales maximization model rather than profit maximization model.

Sales maximization model focuses upon larger sales. This means more prestige to the managers whereas profit maximization model focus upon lager profits . This means large amount of profits will go into the pocket of shareholders.

Conclusion:

Therefore, on the basis of above facts, it is proper to say that, Sales Revenue Maximization Model is better than Profit maximization Model.

Note :

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