Total Revenue

Examples of Total Revenue in the following topics:

• The Supply Curve in Perfect Competition

  • The total revenue-total cost perspective and the marginal revenue-marginal cost perspective are used to find profit maximizing quantities.
  • The various types of cost curves include total, average, marginal curves.
  • There are two ways in which cost curves can be used to find profit maximizing quantities: the total revenue-total cost perspective and the marginal revenue-marginal cost perspective.
  • The total revenue-total cost perspective recognizes that profit is equal to the total revenue (TR) minus the total cost (TC).
  • The marginal revenue-marginal cost perspective relies on the understanding that for each unit sold, the marginal profit equals the marginal revenue (MR) minus the marginal cost (MC).

• Profit-Maximization Pricing

  • Revenue is the amount of money that a company receives from its normal business activities, usually from the sale of goods and services (as opposed to monies from security sales such as equity shares or debt issuances).To obtain the profit maximising output quantity, we start by recognizing that profit is equal to total revenue (TR) minus total cost (TC).
  • The profit-maximizing output level is represented as the one at which total revenue is the height of C and total cost is the height of B; the maximal profit is measured as CB.
  • The above method takes the perspective of total revenue and total cost.
  • A firm may also take the perspective of marginal revenue and marginal cost, which is based on the fact that total profit reaches its maximum point where marginal revenue equals marginal cost.
  • This linear total revenue curve represents the case in which the firm is a perfect competitor in the goods market, and thus cannot set its own selling price.

• Conditions of Perfect Competition

  • The profit is the difference between a firm's total revenue and its total cost.
  • MR (Marginal Revenue) = Change in Total Revenue / Change in Quantity
  • The marginal revenue (MR) is the change in total revenue from an additional unit of output sold.
  • When price is less than average total cost, firms are making a loss.
  • Calculate total revenue, average revenue, and marginal revenue for a firm in a perfectly competitive market

• Profit

  • To obtain the profit maximizing output quantity, you start by recognizing that profit is equal to total revenue (TR) minus total cost (TC).
  • In , the linear total revenue curve represents the case in which the firm is a perfect competitor in the goods market, and thus cannot set its own selling price.
  • The profit maximizing output level is represented as the one at which total revenue is the height of C and total cost is the height of B; the maximal profit is measured as CB.
  • Since total profit increases when marginal profit is positive and total profit decreases when marginal profit is negative, it must reach a maximum where marginal profit is zero - or where marginal cost equals marginal revenue - and where lower or higher output levels give lower profit levels.
  • This linear total revenue curve represents the case in which the firm is a perfect competitor in the goods market, and thus cannot set its own selling price.

• Shut Down Case

  • In the short run, a firm that is operating at a loss (where the revenue is less that the total cost or the price is less than the unit cost) must decide to operate or temporarily shutdown.
  • When determining whether to shutdown a firm has to compare the total revenue to the total variable costs.
  • If the revenue the firm is making is greater than the variable cost (R>VC) then the firm is covering it's variable costs and there is additional revenue to partially or entirely cover the fixed costs.
  • A firm that exits an industry does not earn any revenue, but is also does not incur fixed or variable costs.
  • Firms will produce as long as marginal revenue (MR) is greater than average total cost (ATC), even if it is less than the variable, or marginal cost (MC)

• Difference Between Economic and Accounting Profit

  • Economic profit consists of revenue minus implicit (opportunity) and explicit (monetary) costs; accounting profit consists of revenue minus explicit costs.
  • In one year, it cost $60,000 to maintain production, but earned $100,000 in revenue.
  • The accounting profit would be $40,000 ($100,000 in revenue - $60,000 in explicit costs).
  • Accounting profit is the difference between total monetary revenue and total monetary costs, and is computed by using generally accepted accounting principles (GAAP).
  • Economic profit is the difference between total monetary revenue and total costs, but total costs include both explicit and implicit costs.

• Marginal Cost Profit Maximization Strategy

  • Marginal cost is the change in the total cost that occurs when the quantity produced is increased by one unit .
  • Marginal cost is the change in total cost divided by the change in output.
  • Marginal revenue is the additional revenue that will be generated by increasing product sales by one unit.
  • Marginal revenue is calculated by dividing the change in total revenue by the change in output quantity.
  • This strategy is based on the fact that the total profit reaches its maximum point where marginal revenue equals marginal profit .

• Recognition of Revenue After Delivery

  • In this situation, revenue is not recognized at point of sale or delivery.
  • There are three methods that recognize revenue after delivery has taken place: .
  • For example, if a company collected 45% of a product's sale price, it can recognize 45% of total revenue on that product.
  • The seller records the cash deposit as a deferred revenue, which is reported as a liability on the balance sheet until the revenue is earned.
  • As the delivery of the magazines take place, a portion of revenue is recognized, and the deferred liability account is reduced for the amount of the revenue.

• Marginal Revenue and Marginal Cost Relationship for Monopoly Production

  • revenue, and their spending, i.e. costs.
  • To find the profit maximizing point, firms look at marginal revenue (MR) - the total additional revenue from selling one additional unit of output - and the marginal cost (MC) - the total additional cost of producing one additional unit of output.
  • The marginal revenue curve for monopolies, however, is quite different than the marginal revenue curve for competitive firms.
  • Production occurs where marginal cost and marginal revenue intersect.
  • Production occurs where marginal cost and marginal revenue intersect.

• Recognition of Revenue Prior to Delivery

  • Accrual accounting allows some revenue recognition methods that recognize revenue prior to delivery or sale of goods.
  • The accounting principle regarding revenue recognition states that revenues are recognized when they are earned (transfer of value between buyer and seller has occurred) and realized or realizable (collection is reasonably assured).
  • Revenue must be realizable.
  • For example, if during the year, 25% of the building was completed, the builder can recognize 25% of the expected total profit on the contract.
  • Completion of production method: This method allows recognizing revenues even if no sale was made.