Certified Management Accountant Practice Exam

Profit maximization occurs when:

1. Marginal revenue equals marginal cost

2. Fixed costs are minimized

3. Variable costs are constant

4. Marginal cost is zero

The correct answer is: Marginal revenue equals marginal cost

Profit maximization occurs when marginal revenue equals marginal cost because this principle is fundamental in economics and managerial accounting. When a firm produces and sells an additional unit of a good or service, the change in revenue from that unit is the marginal revenue, while the change in costs is the marginal cost. If marginal revenue exceeds marginal cost, the firm can increase its profit by producing more units since each additional unit sold adds more to revenue than it does to costs. Conversely, if marginal cost exceeds marginal revenue, the firm is losing potential profit by producing that unit. Therefore, the point at which marginal revenue equals marginal cost represents the most efficient level of production for profit maximization; it is the equilibrium where any additional production would not increase overall profit. The other choices presented are related to profit but do not define the specific condition for profit maximization. Minimizing fixed costs or having constant variable costs can improve profitability but does not guarantee maximum profit. Similarly, a marginal cost of zero is not a practical or possible condition for most businesses, as there are typically some costs associated with producing additional units.