Certified Management Accountant Practice Exam 2025 – The Comprehensive All-in-One Guide to Exam Success!

A firm should continue increasing production as long as the marginal cost is less than the selling price. This condition indicates that each additional unit produced adds more to revenue than it does to costs. When this situation exists, the firm is effectively increasing its profits with additional production.

To better understand this principle, consider the relationship between marginal cost and marginal revenue. Marginal cost refers to the cost incurred for producing one more unit, while the selling price (in a competitive market, this also reflects marginal revenue) is the price at which that additional unit can be sold. If the marginal cost of producing an additional unit is less than the price it can be sold for, the firm gains a profit on that additional unit.

As production continues, once marginal cost equals or exceeds the selling price, increasing production would lead to decreased profitability or even financial losses. Therefore, the principle of maximizing profit is closely tied to this relationship.