Drawbacks of Profit Maximization1.Time Value The profit maximiza.pdf

Drawbacks of Profit Maximization:
1.Time Value: The profit maximization objective ignores the timing of returns. It equates a dollar
received today with a dollar received in the future. In fact, $ 100 today is valued more than $ 100
received after one year. It is because the money received in earlier period may be reinvestable to
earn more.
2. Financing and Investors:Some degree of profit maximization is always present. The goal of a
company is to create profits. It has to profit from its business to stay in business. Moreover,
investors and financiers in the company may require a certain level of profits to secure funds for
expansion. Further, a company has to perform well for its shareholders; they expect a return on
their investments. As such, maximizing that profit is always a consideration to some extent
3 Risk:The critics of profit maximization objective argue that it ignores the risk associated with
steam of cash flow of the project. For example, the total profit from two projects may be same
but the profit from one project may be fluctuating widely than the profit from the other project.
The firm with wider fluctuation in profit is riskier. This fact is ignored by profit maximization
objective.
4. Perfectly competitive :The profit maximization objective has greater relevance to a perfectly
competitive firm than to a monopoly firm. Critics argue that a monopoly firm would be earning
super normal profit more or less automatically.
5.Direct Link: Today large-scale corporate type of organizations exist. Different stakeholders
such as owners, managers, customers, creditors, and employees are directly connected with the
organization. The interest of each member in this organizational collusion cannot be achieved
with the sole objective of profit maximization.
6 Survival:The profit maximization objective of the firm has greater relevance to short-run. In
long-run, a firm cannot survive with this objective.
7. Unfair Practice:If all firms keep profit maximization as the primary objective, they may
commit unfair practice to maximize profit
Like the TED spread (the spread between the yield on Treasury bills and Eurodollar bank
deposits shown in class) the spread between the yield on Treasury bills and commercial paper
(the rate paid by corporations) will widen. Deterioration of the economy increases credit risk (the
likelihood of default). Investors will expect greater premium on debt securities subject to default
risk.
The spread will widen because commercial paper is riskier, so the expected rate of return will
increase
FIFO
Purchase/ Received
Issued/Sales
Balance
Date
Units
Unit Cost
Value
Units
Unit Cost
Value
Units
Unit Cost
Value
June 1st
Balance Forward
3
$ 11.00
$ 33.00
June 4th
0
2
$ 11.00
$ 22.00
1
$ 11.00
$ 11.00
June 6th
8
$ 11.50
92
$ -
1
$ 11.00
$ 11.00
8
$ 11.50
$ 92.00
June 9th
0
1
$ 11.00
$ 11.00
$ -
2
$ 11.50
$ 23.00
6
$ 11.50
$ 69.00
June 12th
0
2
$ 11.50
$ 23.00
4
$ 11.50
$ 46.00
June 15th
6
$ 12.00
72
$ -
4
11.5
$ 46.00
6
$.

1. Drawbacks of Profit Maximization:
1.Time Value: The profit maximization objective ignores the timing of returns. It equates a dollar
received today with a dollar received in the future. In fact, $ 100 today is valued more than $ 100
received after one year. It is because the money received in earlier period may be reinvestable to
earn more.
2. Financing and Investors:Some degree of profit maximization is always present. The goal of a
company is to create profits. It has to profit from its business to stay in business. Moreover,
investors and financiers in the company may require a certain level of profits to secure funds for
expansion. Further, a company has to perform well for its shareholders; they expect a return on
their investments. As such, maximizing that profit is always a consideration to some extent
3 Risk:The critics of profit maximization objective argue that it ignores the risk associated with
steam of cash flow of the project. For example, the total profit from two projects may be same
but the profit from one project may be fluctuating widely than the profit from the other project.
The firm with wider fluctuation in profit is riskier. This fact is ignored by profit maximization
objective.
4. Perfectly competitive :The profit maximization objective has greater relevance to a perfectly
competitive firm than to a monopoly firm. Critics argue that a monopoly firm would be earning
super normal profit more or less automatically.
5.Direct Link: Today large-scale corporate type of organizations exist. Different stakeholders
such as owners, managers, customers, creditors, and employees are directly connected with the
organization. The interest of each member in this organizational collusion cannot be achieved
with the sole objective of profit maximization.
6 Survival:The profit maximization objective of the firm has greater relevance to short-run. In
long-run, a firm cannot survive with this objective.
7. Unfair Practice:If all firms keep profit maximization as the primary objective, they may
commit unfair practice to maximize profit
Like the TED spread (the spread between the yield on Treasury bills and Eurodollar bank
deposits shown in class) the spread between the yield on Treasury bills and commercial paper
(the rate paid by corporations) will widen. Deterioration of the economy increases credit risk (the
likelihood of default). Investors will expect greater premium on debt securities subject to default
risk.
The spread will widen because commercial paper is riskier, so the expected rate of return will
increase
FIFO
Purchase/ Received

2. Issued/Sales
Balance
Date
Units
Unit Cost
Value
Units
Unit Cost
Value
Units
Unit Cost
Value
June 1st
Balance Forward
3
$                      11.00
$            33.00
June 4th
0
2
$                11.00
$           22.00
1
$                      11.00
$            11.00
June 6th
8
$                           11.50
92
$                  -  
1
$                      11.00
$            11.00
8
$                      11.50
$            92.00

3. June 9th
0
1
$                11.00
$           11.00
$                   -  
2
$                11.50
$           23.00
6
$                      11.50
$            69.00
June 12th
0
2
$                11.50
$           23.00
4
$                      11.50
$            46.00
June 15th
6
$                           12.00
72
$                  -  
4
11.5
$            46.00
6
$                      12.00
$            72.00
June 18th
0
2
11.5
$           23.00

4. 2
$                      11.50
$            23.00
6
$                      12.00
$            72.00
June 20th
0
2
$                11.50
$           23.00
1
$                12.00
$           12.00
5
$                      12.00
$            60.00
June 22nd
6
$                           12.50
75
$                  -  
5
$                      12.00
$           60.00
6
$                      12.50
$            75.00
June 25th
0
2
$                12.00
$           24.00
$                   -  
June 28th
0

5. 3
$                12.00
$           36.00
6
$                      12.50
$            75.00
Cost OF Goods
$         197.00
Closing Inventory
$            75.00
LIFO
Purchase/ Received
Issued/Sales
Balance
Date
Units
Unit Cost
Value
Units
Unit Cost
Value
Units
Unit Cost
Value
June 1st
Balance Forward
3
$                      11.00
$            33.00
June 4th
0
2
$                11.00
$           22.00
1
$                      11.00

6. $            11.00
June 6th
8
$                           11.50
92
$                  -  
1
$                      11.00
$            11.00
8
$                      11.50
$            92.00
June 9th
0
3
$                11.50
$           34.50
1
11
$            11.00
0
$                  -  
5
11.5
$            57.50
June 12th
0
2
$                11.50
$           23.00
1
$                      11.00
$            11.00
$                  -  
3
11.5

7. $            34.50
June 15th
6
$                           12.00
72
1
11
$            11.00
3
11.5
$            34.50
6
$                      12.00
$            72.00
June 18th
0
2
$                12.00
$           24.00
1
$                      11.00
$            11.00
3
$                      11.50
$            34.50
4
$                      12.00
$            48.00
June 20th
0
3
$                12.00
$           36.00
1
$                      11.00
$            11.00

8. 3
$                      11.50
$            34.50
$                  -  
1
$                      12.00
$            12.00
June 22nd
6
$                           12.50
75
$                  -  
1
$                      11.00
$            11.00
3
$                      11.50
$            34.50
1
$                      12.00
$            12.00
6
$                      12.50
$            75.00
June 25th
0
2
$                12.50
$           25.00
$                   -  
June 28th
0
3
$                12.50
$           37.50
1

9. $                      11.00
$            11.00
3
$                      11.50
$            34.50
1
$                      12.00
$            12.00
1
$                      12.50
$            12.50
Cost OF Goods
$         202.00
Closing Inventory
$            70.00
FIFO
Purchase/ Received
Issued/Sales
Balance
Date
Units
Unit Cost
Value
Units
Unit Cost
Value
Units
Unit Cost
Value
June 1st
Balance Forward
3
$                      11.00
$            33.00
June 4th
0

10. 2
$                11.00
$           22.00
1
$                      11.00
$            11.00
June 6th
8
$                           11.50
92
$                  -  
1
$                      11.00
$            11.00
8
$                      11.50
$            92.00
June 9th
0
1
$                11.00
$           11.00
$                   -  
2
$                11.50
$           23.00
6
$                      11.50
$            69.00
June 12th
0
2
$                11.50
$           23.00
4
$                      11.50

11. $            46.00
June 15th
6
$                           12.00
72
$                  -  
4
11.5
$            46.00
6
$                      12.00
$            72.00
June 18th
0
2
11.5
$           23.00
2
$                      11.50
$            23.00
6
$                      12.00
$            72.00
June 20th
0
2
$                11.50
$           23.00
1
$                12.00
$           12.00
5
$                      12.00
$            60.00
June 22nd
6

12. $                           12.50
75
$                  -  
5
$                      12.00
$           60.00
6
$                      12.50
$            75.00
June 25th
0
2
$                12.00
$           24.00
$                   -  
June 28th
0
3
$                12.00
$           36.00
6
$                      12.50
$            75.00
Cost OF Goods
$         197.00
Closing Inventory
$            75.00

Solution

Drawbacks of Profit Maximization:
1.Time Value: The profit maximization objective ignores the timing of returns. It equates a dollar
received today with a dollar received in the future. In fact, $ 100 today is valued more than $ 100
received after one year. It is because the money received in earlier period may be reinvestable to
earn more.
2. Financing and Investors:Some degree of profit maximization is always present. The goal of a

13. company is to create profits. It has to profit from its business to stay in business. Moreover,
investors and financiers in the company may require a certain level of profits to secure funds for
expansion. Further, a company has to perform well for its shareholders; they expect a return on
their investments. As such, maximizing that profit is always a consideration to some extent
3 Risk:The critics of profit maximization objective argue that it ignores the risk associated with
steam of cash flow of the project. For example, the total profit from two projects may be same
but the profit from one project may be fluctuating widely than the profit from the other project.
The firm with wider fluctuation in profit is riskier. This fact is ignored by profit maximization
objective.
4. Perfectly competitive :The profit maximization objective has greater relevance to a perfectly
competitive firm than to a monopoly firm. Critics argue that a monopoly firm would be earning
super normal profit more or less automatically.
5.Direct Link: Today large-scale corporate type of organizations exist. Different stakeholders
such as owners, managers, customers, creditors, and employees are directly connected with the
organization. The interest of each member in this organizational collusion cannot be achieved
with the sole objective of profit maximization.
6 Survival:The profit maximization objective of the firm has greater relevance to short-run. In
long-run, a firm cannot survive with this objective.
7. Unfair Practice:If all firms keep profit maximization as the primary objective, they may
commit unfair practice to maximize profit
Like the TED spread (the spread between the yield on Treasury bills and Eurodollar bank
deposits shown in class) the spread between the yield on Treasury bills and commercial paper
(the rate paid by corporations) will widen. Deterioration of the economy increases credit risk (the
likelihood of default). Investors will expect greater premium on debt securities subject to default
risk.
The spread will widen because commercial paper is riskier, so the expected rate of return will
increase
FIFO
Purchase/ Received
Issued/Sales
Balance
Date
Units
Unit Cost
Value
Units

14. Unit Cost
Value
Units
Unit Cost
Value
June 1st
Balance Forward
3
$                      11.00
$            33.00
June 4th
0
2
$                11.00
$           22.00
1
$                      11.00
$            11.00
June 6th
8
$                           11.50
92
$                  -  
1
$                      11.00
$            11.00
8
$                      11.50
$            92.00
June 9th
0
1
$                11.00
$           11.00
$                   -  
2

15. $                11.50
$           23.00
6
$                      11.50
$            69.00
June 12th
0
2
$                11.50
$           23.00
4
$                      11.50
$            46.00
June 15th
6
$                           12.00
72
$                  -  
4
11.5
$            46.00
6
$                      12.00
$            72.00
June 18th
0
2
11.5
$           23.00
2
$                      11.50
$            23.00
6
$                      12.00
$            72.00
June 20th

16. 0
2
$                11.50
$           23.00
1
$                12.00
$           12.00
5
$                      12.00
$            60.00
June 22nd
6
$                           12.50
75
$                  -  
5
$                      12.00
$           60.00
6
$                      12.50
$            75.00
June 25th
0
2
$                12.00
$           24.00
$                   -  
June 28th
0
3
$                12.00
$           36.00
6
$                      12.50
$            75.00
Cost OF Goods

17. $         197.00
Closing Inventory
$            75.00
LIFO
Purchase/ Received
Issued/Sales
Balance
Date
Units
Unit Cost
Value
Units
Unit Cost
Value
Units
Unit Cost
Value
June 1st
Balance Forward
3
$                      11.00
$            33.00
June 4th
0
2
$                11.00
$           22.00
1
$                      11.00
$            11.00
June 6th
8
$                           11.50
92
$                  -  
1

18. $                      11.00
$            11.00
8
$                      11.50
$            92.00
June 9th
0
3
$                11.50
$           34.50
1
11
$            11.00
0
$                  -  
5
11.5
$            57.50
June 12th
0
2
$                11.50
$           23.00
1
$                      11.00
$            11.00
$                  -  
3
11.5
$            34.50
June 15th
6
$                           12.00
72
1
11

19. $            11.00
3
11.5
$            34.50
6
$                      12.00
$            72.00
June 18th
0
2
$                12.00
$           24.00
1
$                      11.00
$            11.00
3
$                      11.50
$            34.50
4
$                      12.00
$            48.00
June 20th
0
3
$                12.00
$           36.00
1
$                      11.00
$            11.00
3
$                      11.50
$            34.50
$                  -  
1
$                      12.00
$            12.00

20. June 22nd
6
$                           12.50
75
$                  -  
1
$                      11.00
$            11.00
3
$                      11.50
$            34.50
1
$                      12.00
$            12.00
6
$                      12.50
$            75.00
June 25th
0
2
$                12.50
$           25.00
$                   -  
June 28th
0
3
$                12.50
$           37.50
1
$                      11.00
$            11.00
3
$                      11.50
$            34.50
1
$                      12.00

21. $            12.00
1
$                      12.50
$            12.50
Cost OF Goods
$         202.00
Closing Inventory
$            70.00
FIFO
Purchase/ Received
Issued/Sales
Balance
Date
Units
Unit Cost
Value
Units
Unit Cost
Value
Units
Unit Cost
Value
June 1st
Balance Forward
3
$                      11.00
$            33.00
June 4th
0
2
$                11.00
$           22.00
1
$                      11.00
$            11.00
June 6th

22. 8
$                           11.50
92
$                  -  
1
$                      11.00
$            11.00
8
$                      11.50
$            92.00
June 9th
0
1
$                11.00
$           11.00
$                   -  
2
$                11.50
$           23.00
6
$                      11.50
$            69.00
June 12th
0
2
$                11.50
$           23.00
4
$                      11.50
$            46.00
June 15th
6
$                           12.00
72
$                  -  
4

23. 11.5
$            46.00
6
$                      12.00
$            72.00
June 18th
0
2
11.5
$           23.00
2
$                      11.50
$            23.00
6
$                      12.00
$            72.00
June 20th
0
2
$                11.50
$           23.00
1
$                12.00
$           12.00
5
$                      12.00
$            60.00
June 22nd
6
$                           12.50
75
$                  -  
5
$                      12.00
$           60.00
6

24. $                      12.50
$            75.00
June 25th
0
2
$                12.00
$           24.00
$                   -  
June 28th
0
3
$                12.00
$           36.00
6
$                      12.50
$            75.00
Cost OF Goods
$         197.00
Closing Inventory
$            75.00