Analysis of demand, cost, and profit relationships, the fourth stage of the process, can be accomplished through marginal analysis or breakeven analysis. Marginal analysis combines the demand schedule with a firm’s costs to develop an optimum price for maximum profit. This optimum price is the point at which marginal cost---the cost associated with producing one more unit of the product---equals marginal revenue. Marginal revenue is the change in total revenue that occurs when one additional unit of the product is sold. In reality, an organization’s cost and revenue relationships are difficult to determine. Therefore, marginal analysis serves only as a model. It offers little help in pricing new products before costs and revenues are established.
Analysis of demand, cost, and profit relationships, the fourth stage of the process, can be accomplished through marginal analysis or breakeven analysis. Marginal analysis combines the demand schedule with a firm’s costs to develop an optimum price for maximum profit. This optimum price is the point at which marginal cost---the cost associated with producing one more unit of the product---equals marginal revenue. Marginal revenue is the change in total revenue that occurs when one additional unit of the product is sold. In reality, an organization’s cost and revenue relationships are difficult to determine. Therefore, marginal analysis serves only as a model. It offers little help in pricing new products before costs and revenues are established.
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