Discuss the reliance of Baumol’s model of sales revenue maximization in the present context?

Discuss the reliance of Baumol’s model of sales revenue maximization in the present context?

Ans: There are many economists who have examined the objectives of the firms. In which are economists in Baumol.
According Baumol’s model of most managers will try to maximize sales revenue. There are many reasons for this like an example.

(1) The salary and other earnings of managers are more closely related to sales revenue than to profits.
(2) Banks and financers looks at sales revenue while financing the corporation.

The sales revenue trend is a readily available indicator of performance of the firm. Growth in sales increases the competitive strength of the firm. However in the long run, sales maximization of profit maximization may converge into are objective.
The main objective of each of every firm is to earn maximum profits. Any firm can maximize their profits by following methods.

(1) By increasing sales revenue
(2) By increasing their capital investments
(3) By controlling risks of uncertainty of business
(4) By decreasing cost of production etc.

However, there are many more objective except profit maximization. Which can be

1) Maximization of firm’s growth rate
2) Maximization of managers own utility of satisfaction
3) Making a satisfactory rate of profit
4) Long run survival of the firm and
5) Entry – prevention and risk avoidance

But according to Baumor’s model of sales revenue maximization, firm can increase his sale though increase in sales revenue most firms have sidelined short-term profit as their objective firms are often found to sacrifice their short-term profit for increasing the future long-term profit. Thus, for example, firms undertake research and development expenditure, expenditure on new capital equipment or major marketing programmes which require expenditure initially but are meant to generate future profits. The objectives of the firm is this to maximize the present of discounted value of all future profits and can be stated as:

PV (II) = n II t
E (1-r) t


PV = present value of all expected future profits
II n = Expected profit in 1,2 ------ n years
R = Appropriate discount rate
T = Time period

Assumed profit is equal to total revenue minus Total cost, then the value of the firm can also be rated as

Value of firm = n Tr t – Tct
E
t=1 (1+r) t

This maximizing the discounted value of all future profits is equivalent to maximizing the value of the firm.

A careful inspection of the equation suggests how a firms manages and workers can influence its value for example, in representatives work hard to increase its total revenues, while its production managers and manufacturing engineers strive to reduce its total costs. At the same time, its financial managers play a major role in obtaining capital, and hence influence the equation, while its research and development personal invent and reduce its total cost.

In banking sectors variety of loan and financial help[s provided to the various customers. But Banks provide it only those where, they can earn maximum returns of p0rofit by selling their loans. So Banks and financers look at sales revenue while financing the corporations.

From maximizing of sales revenue, their will be increase in the strength of the firm. So, sales revenue trend is a readily available indicator of performance of the firm. Growth in sales increases the competitive strength of the firm.

In the long run, sales maximization and profit maximization may converge into one objective.