1.2.3 - Revenue and profit calculations

Calculating total revenue

Total revenue (TR) is the income a business receives from selling its output over a stated period. Revenue is measured before deducting production costs.

An illustrative café sells 240 lunches at £7 each in a day, so $TR=£7\times240=£1{,}680$. Use units sold, rather than assuming all output produced was sold. If 260 lunches were made but only 240 were sold, the unsold 20 do not contribute sales revenue.

If products have different prices, calculate and add their revenues. Selling 80 sandwiches at £4 and 50 drinks at £2 gives $TR=(80\times£4)+(50\times£2)=£420$. Multiplying the combined quantity by one product's price would be wrong.

A price rise does not guarantee higher TR because quantity sold may fall. Illustrative sales of 100 units at £10 give £1,000; selling 80 units at £12 gives £960. When comparing a decision, use the supplied new quantity as well as the new price. Revenue is a flow over a period: a firm's bank balance is not its sales revenue for that period.

Calculating profit and loss

Profit is the amount by which total revenue exceeds total cost over the same period. A firm with costs greater than revenue makes a loss.

An illustrative bicycle business sells 40 bicycles at £180 in a month. TR is $40\times£180=£7{,}200$. Monthly fixed costs are £1,800 and variable costs are £100 per bicycle, so TVC is £4,000 and TC is £5,800. Profit is $£7{,}200-£5{,}800=£1{,}400$. Subtracting only variable costs would overlook the fixed costs.

If TR were £5,300 with TC of £5,800, profit would be $-£500$: a loss of £500. State the sign or explicitly say “loss”; “£500 profit” would reverse its meaning. At $TR=TC$, profit is zero: revenue covers the costs included in the calculation.