6533b7d1fe1ef96bd125c047

RESEARCH PRODUCT

Profit Margin Ratio, Markup, Profit Margin Per Unit, Economic Profit, and Profitability as Objectives for the Firm: An Economic Point-of-View

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description

We study five operational objectives for the firm: three marketing objectives (maximizing profit-margin ratio, maximizing markup, and maximizing profit-margin-per-unit), and two financial objective (maximizing economic profit (i.e., EVA) and maximizing profitability), as alternatives to the scholarly objective of maximizing profit. We prove that (i) Sales are lowest for profit-margin-per-unit, intermediate for profit-margin ratio and markup, and highest for profit maximization. Input consumption, including labor, is lower. Prices are in the reverse order. In terms of profit, profit-margin ratio, markup, and profit-margin-per-unit are necessarily less efficient than the classical profit maximization. (ii) By respect to profit-maximizing firms, sales of profitability-maximizing firms and input consumption are lowest, prices are highest. Maximizing economic profit leads to intermediate results. Managers should be aware that these popular alternative objectives reduce the net profit and lead the firm to go upmarket.