Page 215 - DMGT403_ACCOUNTING_FOR_MANAGERS

Accounting for Managers

Notes The profit maximization can be had by way of implementing the following two different strategies:
Figure 10.1

Profit maximization

Increasing Selling Price Cost Control & Effectiveness

External Environment Influence Within the control of the firm
- Competitors

From the following equation, the profit can be maximized
Selling Price – Cost = Profit

There are two possible ways to maximize the profit:
1. Increasing the selling price and keeping the cost remains the same.
2. Reducing the cost and retaining the selling price as it is.

Did u know? Why the later is more feasible than the earlier?
It is explained through two different strategies. They are as follows:
Strategy No. 1
Increasing selling price: Higher price/Increased price is inversely correlated with the
demand of the product. This will affect the volume of sales due to the competitors stand on
the lowest price. It is obviously understood that the maximization of profit through an
increase in the price of a product will lead to loose the buyers. Earning/maximizing
profits through increased selling price is not under the clutches of the business enterprises.
It means that increasing the selling price to maximize profit is influenced by too many
uncontrollable factors. This leads to sources of too much reluctance of business fleeces to
raise the selling price.
Strategy No. 2
Reducing/cutting down the cost: To maximize the benefits, the second best alternative is
to cut/reduce the cost of operations in producing a product or service. Minimizing the cost
is a cumber some task which involves a lot of careful analysis and practices. Historical
costing is not an effective tool of analysis in providing the required information for
management to take rational decisions.

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