Sales-Revenue

Maximisation
Kamaldeep Sahu
Aditya Pandhare
Vandana Gaur
Chandrashekhar Kumar

Given by William Baumol

A firm aims at maximizing its sales
revenue subject to a profit constraint.
Reason: Managers believe that their
salaries, power and standing inside the
company and in the business
community at large are more related
to revenue maximization.

 Since management has to keep

shareholders in a contented state for which
they need to earn sufficient profits to pay
dividends, hence profit constraint was
introduced.
The precise magnitude of profit constraint
is left vague but should be large enough to
satisfy existing shareholders and to attract
prospective shareholders.

Oq3 - Point of maximum profit(Point at which revenue curve is farthest from

costs)
X line represents the minimum profit to be maintained to satisfy shareholders
Oq5 Point of maximum revenue(highest point of total revenue curve)

Role of Advertising
Sales revenue maximizing firm will both
produce a larger output and spend more on
advertising than a profit maximizing firm.
Both an increase in fixed costs(due to
advertising)and tax on profits prior to
distribution of dividends will force the sales
revenue maximizing firm to reduce output and
raise price since firm cannot meet its profit
constraint.
Remains indifferent for a profit maximizing firm.

Criticisms of the model

In Oligopoly, due to kinked demand model,
revenues and profits will be simultaneously
maximized Shepherd.
Revenue maximization and Profit maximization
objectives produce same outputs in longer run
(uses kinked demand model) Mabry
Both profit and sales maximisers only choose
the same output where advertising and other
forms of non-price competition are either
completely in-effective or impossible
Hawkins.

The Empirical Evidence

Above average pay(Executive salaries)
leads to above average profits Patton.
Relation between executive pay and sales
was apparently stronger Roberts.
Instead of income to sales, its sales to
income Elbing and McGuire.
Firm with executives having financial
rewards closely paralleled to stockholders
interests performed better in stock market
Masson.