According to Baumol, every business firm aims at maximization it’s sales revenue (price x quantity)rather than its profit. Hence his hypothesis has come to be known as sales maximization theory & revenue maximization theory. According to baumol, sales have become an end by themselves and accordingly sales maximization has become the ultimate objective of the firm. Hence, the management of a firm directs its energies in promoting and maximizing its sales revenue instead of profit.
The goal of sales maximization is explained by the management’s desire to maintain the firm’s competitive position, which is dependent to a large extent on its size. Unlike the shareholders who are interested in profit, the management is interested in sales revenue, either because large sales revenue is a matter of prestige or because its remuneration is often related to the size of the firm’s operations than to its profits. Baumol, however does not ignore the cost of production which has to be covered and also a margin of profit. In fact, he advocates the adoption of a price, which will cover the cost and also will yield a minimum rate of profits. According to Baumol the firm will have to choose that output which will yield adequate profit even through it may not achieve sales maximization
