Question

MANAGERIAL ECONOMICS:

“ More sales more profits” Do you agree ? Explain your answer. Minimum of five pages with references.

Answer 1

Introduction:

Yes i agree to the statement that more sales bring more profits in most of the circumstances. Here's why:

Understanding the concept :

Sale refers to the the transaction or agreement that takes place between two parties who agree on terms to buy or sell a commodity or a service in exchange of a monetary value.
The buyer receives the goods to satisfy the needs which the seller sells.
Sales thus can be defined as the total amount of money that a business organisation (seller) receives while making a sale of overall products or commodities it offers.

Profit can be described as the amount of money by which a business is better off. In other words it is the amount or difference between the amount of money spent by the organization and the amount of money earned from the primary operations of business.
Thus it is simply a financial gain.

Arguments:
The concepts of sales and profits thus reflects that there is a direct relationship between both , increase in sales leads to the corresponding increase in the profits and vice versa.

The sales of business organization being the primary source of operation generates revenue.
Revenue is the total amount of inflow in the business as a result of sales proceeds. This revenue consists of the two important Amounts :

1) The amount which is entitled to various parties or stakeholders e.g suppliers, vendors , creditors, distributors, transporters etc . This amount in business terminology is referred to as "cost" This cost incurred makes the sales possible.

2) Revenue also consists of an amount which exceeds the cost. This amount is basically referred as profit margin.
Price of product less cost of goods is the profit margin.

Therefore with the help of this explanation it can be easily inferred that more the revenue earned by business organisations, more will be the profits earned because more revenue means more number of products are sold. More number of products sold means more sales.
Hence more the sales , more will be profits for the business.

Supporting facts:
Sales not only by its basic nature increases the profits, but also facilitates increasing the business operations and production through referencing process.

Explanation:
When sales are increased by a new business , now the products are widely available , more is the reach and availability of the product , more the availability more will be the purchases
, more purchases bring more revenue , creating more profits.

Sales also create a snowball effect , where everyone satisfied with the product will inform the others to purchase the product. More the purchases more will be , more will be the revenue , more the revenue more will be the profits. Thus more sales instigate more profits.

Sales indirectly increase profits:

Another proof of the statement is the scenario where a current business decreases the price of the product initially , on the price reduction , the sales of the business increase , because more people who initially could not afford to buy the product will now make purchases , and those considered it expensive will get attracted towards it more , therefore increasing the purchases, more purchases bring more amount revenue but profit margin will be less because the difference between the price and cost will be less as depicted.
But to look more deeper and long term effects:
An important factor to note here is more sales lead to mass distribution.
And mass distribution and efficient technology often leads to decrease in the cost per units of product through e.g reduction in wastages, more efficiency in resource utilization, more benefits at marginal products etc which ultimately contribute to adding value to the business and increase profits in the form of following:

More customer loyalty
Customer commitment
Building new customer base
Product positioning
All these factors will contribute to increasing profits , indirectly with sales.

Another important factor is:
Reducing Costs initially , to decrease prices will increase the profits
When an organization operates efficiently , the costs incurred in producing goods will decrease, due to reduction in cost per unit , the sales will increase , increasing the profits by increased revenue where revenue consists of amount entitled to stake holders is less, and the profit margin is more

Promotion of product, brand recognition , goodwill , customer loyalty also can be considered as the factors that play an important role in increasing the sales of the company.

Explanation with an example:
Due to intense advertisement policy followed by the companies today ,
with the motive of increasing the sales of organization have resulted in companies earning more revenue in shorter time due to which they indulge in the activities of expansion , diversification , mergers , acquisitions, expanding product lines , vertical integration , etc.
All these activities generate profits in long run by enabling business growth, success rate , progress etc.
And all these activities can be attributed to increase in the sales,
The main reason being the fact that more sales which generated more revenue can be retained in the business (not paying to the shareholders temporarily) for growing the business facilitating long term benefits

Increased Sales make transactions efficient and shortens the sales cycle , thus increase the closing rate , lengthens the client retention, builds credibility, increases efficiency in sources of supply , builds trust and thus increases profits through increasing the worth of company.

Hence proved!

Dear student i have tried my best to answer in detail , but i expect you to know that there is time frame given to answer a question, so this could be completed with a dedicated speed.
Moreover i have kept the explanation simple to understand , no business terminology. Hope u like it :)
The work is original !
Good luck , god bless