When nominal sales revenue is maximised, does it also mean that the profit will also be maximised?

Question

Relation between nominal sales revenue and profit for the world oil industry

Answer 1

Not necessarilly.

Though SOMETIMES,,it Coincidentally Does.
That's actually the Goal of Mgmnt--to strive for
the "sweet spot" of Revs/Profit Margin optimum balance.

Sales is VOLUME

Profit is "Leftover $$" after all expenses

the Economy of SCALE begins to ramp-up Profit Margins,,but only to the point of Max Efficiency of Production & Transmission & marketting.

VERY oversimplified model as an example.
*Imagine a Oil Tanker that can carry 100,000 Bbls of Crude

* It makes One Trip ,,fully loaded per week at "X Cost"

* Oil Company increases Production 20% and puts that on the market

* To get that TO MARKET on a Monthly Basis,,,they must Transport 80,000 Extra Bbls---less than a Full Load

*Their Gross Revenue goes UP,,,while Profit Margin is Reduced.
Because they are paying More Per BBL for Transport Costs.

A 100,000 Bbl Transport Price,,,for a 80,000bbl Load

Vastly more complicated than that.

The principle is that "Oil Industry" operates as near 100% efficiency as possible in terms of Thruput & Infrastructure capacity.

It COSTS them to cut back on thruput,,,or to Increase it.

Oil/Gas wells are Not anywhere Near as "throttle-able" as many folks imagine.
They can be Easily damaged by being Under/Overflowed.
The damage can require substantial expense to remediate,,
And in Many instances the damage is permanent.

Short-Term production stimulation can be at the expense of total well life production.


"We" get certain perceptions from media,etc about Various Capacities & Abilities in Oil Biz.

While it's TRUE that most of the chain has some Upside capacity,,,it's a lot smaller than is commonly beleived.

A Small or Moderate Increase in Production can be achieved with Little/No additional expense.

In such a scenario GROSS REVENUE increases,,
And Profit Margins increase exponentially.
It's like they are Selling oil "outta thin air" in terms of additional Expenses.

But there's a definite Ceiling to that.
At some Point of capacity,,
"The Next Barrel" costs "Millions of $$$" to get to market.

Revenues Rise by Sale Price of that "one extra Bbl"
COSTS rise ,,,by those "Million$$$$"

It's a delicate balance,,lots moreso than is commonly beleived.
And it all plays out according to a BUNCH of very Dynamic Variables

Hope that makes any sense

Answer 2

"maximizing production..." You're talking like an outsider. You're an economist now. To maximize production would be to have every employee work 24 hours a day, 7 days a week. Do you mean optimal level of output? As in would they be producing the perfect amount of goods in order to make the most money? Then the answer is yes of course, because you already gave the answer in the question-- "maximizes profit." The definition of maximizing profit is producing at the price and level of output that makes the most profit. The reason the above person said no is prob because they thought you meant the most efficient level of production. Which is a situation where the firm produces at the lowest per-unit cost. Which is why you should be more specific when you're asking your questions, so that you may get the exact response that you're looking for. Hope this clears things up.

Answer 3

No it doesn't

While sales maximisation may lead to profit maximisation, it does not necessary mean this will occur.

Sales maximisation means you will sell as many units as possible no matter what.

If you want to maximise your profit, you will produce where the marginal revenue = marginal cost.

The oil industry controls the level of sales to limit the suppy of oil, to increase the price, and maximise profit.

They could sell millions, hundreds of millions more barells a say, which would maximise sales revenue, but it would reduce the price, and increase the costs of production, which would not maximise profit.

Answer 4

nominal sale maxmisation ensures profit maximisation if prices and costs are linear.

in case of oil the price is unstable and costs are nonlinear, so the answer is no.

Answer 5

No,not if the expenses revenue is high, this will cause a lower profit margin.

Answer 6

reli wow!