Transcript profit as business objective

PROFIT FORMULA
Profit Formula
Profit = Sales – Variable Cost – Fixed Cost
P=S – V – F
 P=S – (V+F)=(S-V)-F
Where P = Total Profit, S=Sales value
V= Total variable cost, F= Total Fixed Cost
BREAK-EVEN ANALYSIS
It is an application of CVP analysis which
involves the method of presenting to
management the effect of changes in volumes
on profits by indicating at what level the total
cost and total revenue will be in equilibrium,
i.e., by indicating the Break-even Point. Breakeven analysis is a technique of having a
preview of profit prospects and a tool of profitplanning by integrating the cost and revenue
estimates to ascertain the profits and losses
associated with different levels of output.
BREAK-EVEN CHART
It is a graphical representation from which
Break-even Point (BEP) and related categories
are determined graphically. The BE Chart
depicts at various levels, the following
information:
i) Variable costs, fixed costs and total cost.
ii) Break-even point.
iii) Margin of Safety.
iv) Sales value.
BREAK-EVEN-POINT
It is that volume of production and sales where there is no profit
or loss, i.e., where Total Revenue and Total Cost lines intersect.
Total Sales
Angle of
incidence
Operating Loss
BEP
BEP
(Units)
O
Opening Profit
MOS
(Units)
Total Fixed Cost
Output (Units)
1) CONTRIBUTION: It is the excess of
sales revenue over and above the total variable
costs.
Contribution=Sales – Variable Costs
Again since Profit=(Sales – Variable Cost) –
Fixed Cost
Profit = Contribution – Fixed cost
Contribution = Fixed Cost + Profit.
2) PROFIT-VOLUME RATIO: It represents the
ratio of contribution to sales and called as p/v
ratio . It has property fundamental that p/v ratio
remains constant at various levels of activity
provided there is no change in either selling price
(per
unit)
or
variable
cost
(per
p Contribution

v
Sales
Sales  VariableCost

Sales
unit).
PROFIT AS BUSINESS OBJECTIVE
Accounting Profit vs. Economic Profit
Accounting profit = TR – (W + R + I + M)
Where W = wages and salaries, R= rent,
I = interest,
and M = cost of materials.
CONTROVERSY OVER PROFIT MAXIMIZATION
OBJECTIVE:
THEORY VS PRACTICE
Arguments in Defence of Profit
Maximization Hypothesis
Profit is indispensable for firm’s survival.
BAUMOL’S HYPOTHESIS OF SALES
REVENUE MAXIMIZATION
Baumol has postulated maximization
of sale revenue as an alternative to
profit- maximization objective.
MARRIS’S HYPOTHESIS OF
MAXIMIZATION OF FIRM’S
GROWTH RATE
WILLIAMSON’S HYPOTHESIS
OF
MAXIMIZATION OF
MANAGERIAL UTILITY
FUNCTION
DEFINITION OF NATIONAL INCOME
Conceptually, national income is the
money
value of the end result of all
economic
activities of the nation.
GROSS NATIONAL PRODUCT (GNP)
The GNP is defined as the value of
all final
goods and
services
produced during a specific period,
usually one year, plus
incomes
earned abroad by the nationals
minus incomes earned locally by the
foreigners.
GROSS DOMESTIC PRODUCT (GDP)
The Gross Domestic Product (GDP) is
defined as the market value of all final
gods and services produced in the
domestic economy during a period of
one year, plus income earned locally by
the foreigners minus incomes earned
abroad by the nationals.
NET NATIONAL PRODUCT (NNP)
NNP is defined as GNP less depreciation,
i.e.,
NNP = GNP – Depreciation
METHODS OF MEASURING NATIONAL
INCOME
• Net Output or Value Added Method
• Factor-Income Method
• Expenditure Method
MARGINAL PROPENSITY TO CONSUME
(MPC)
The concept of MPC is related to the
marginal consumption-income
relationship. In other words, MPC refers
to the relationship between change in
consumption ( C) and the change in
income ( Y) The MPC is symbolically
expressed as C / Y
THE DYNAMICS OF INVESTMENT
MULTIPLIER
The dynamics of multiplier tells
how ( I) a Multiplies into ( Y) .
Investment means expenditure on
factors of production – capital and
labour .
DETERMINANTS OF ECONOMIC
GROWTH
There are four important determinants of
economic growth, viz.,
1. Human resources and its quality,
1. Natural resources,
1. Capital formation, and
4. Technological development
HARROD-DOMAR THEORY OF
GROWTH
Both Harrod and Domar consider capital
accumulation as a key factor in the process of
economic growth.
THE NEO-CLASSICAL MODEL
According to the neo-classical model, rate of economic
growth depends on the growth rate of (i) capital stock,
K; (ii) labour supply, L; and (iii) technological progress
over time, T. The relationship between the national
output and these variables may be expressed in the
form of a production function, i.e.,
Y=F(K, L, T)
Where Y= national output (at constant price),
K=stock of capital L = labour supply, and T= the
scale of technological progress.
PHASES OF BUSINESS CYCLES
1. Expansion of economic activities,
2. Peak of boom or prosperity,
3. Recession, the downtrend,
4. Trough, the bottom of depression, and
5. Recovery and expansion.
Steady Growth line
Peak
Line of cycle
THEORIES OF BUSINESS CTCLE
1. The Pure Monetary Theory,
2. The Monetary Overinvestment Theory ,
3. The Non- monetary Overinvestment
Theory ,
4. Innovation Theory,
5. Acceleration Principle of Trade Cycle,
CONCEPT AND OBJECTIVES OF
STABALIZATION
Stabalization does not mean creating
condition
for
economic
stagnation.
Stabalization and stagnation or freezing
should not be treated as synonymous.
Stabalization broadly means preventing
the extremes of ups and down.
FISCAL POLICY
The ‘fiscal policy’
government policy
refers
to
the
of changing its taxation and public
expenditure
programmes
certain
intended
predetermined objectives.
to
achieve
MONETARY POLICY
Monetary policy refers to the central
bank’s programme of changing monetary
variables.
(i) Open market operations,
(ii) changes in bank rate (or discount rate), and
(iii) changes in the statutory reserve ratios.
BASIS OF FOREIGN TRADE
The basis of international trade is the
difference in the resource endowments of
the nations.
RICARDIAN THEORY OF COMPARATIVE
ADVANTAGE
The theory of absolute advantage gives
the impression that trade between two
countries can be possible and mutually
gainful only if both the countries have
absolute advantage in the production of
at least one commodity and absolute
disadvantage in the production of at least
one commodity.
TERMS OF TRADE
Terms of trade is defined as the quantity of
domestic goods that must be given in exchange for
one unit of imported goods.
FREE TRADE POLICY
Free trade policy is based on the principle of
non-interference by the government in the
foreign trade.
THE BALANCE OF PAYMENTS
Definition
The balance
is defined as “ a
of
of payment
systematic
record
all economic transactions between
the residents of a country and residents
of foreign countries” during a certain
period of time.
BALANCE OF PAYMENTS
ACCOUNTS
(i) Current accounts and
(ii) Capital accounts.
INDIRECT MEASURES TO
CORRECT ADVERSE BOP
(i) Income measures, and
(ii) Price measures.
DIRECT MEASURE: EXCHANGE CONTROL