Introduction
A company's revenue is what it earns from selling commodities, and services to consumers, which are its normal business pursuits. It is also called turnover or sales. Royalties, fees, or interests may also be a source of revenue.
By setting a cost price less than or equivalent to the market cost price, an enterprise believes it can sell as many quantities of its product as it needs. The rationale for lowering the cost price of a product is lost in such a scenario. As a result, the enterprise should set a cost price that matches the market price of the commodity to the greatest extent possible.
The Types of Revenues
Total revenue: The total revenue is the total amount a vendor can collect from the sale of commodities or services to the customer. The price of the commodities can be expressed as P × Q, which means the cost price of the commodities multiplied by the amount sold. Therefore, total revenue (TR) is defined as the market cost price of the commodity (p) multiplied by the enterprise's output (q).
Thus,
TR = p × q
Where
TR-Total Revenue,
P-Price,
Q-Quantity.
Average revenue: The average revenue represents the revenue initiated per unit of output sold. The average revenue contributes greatly to the profit of any enterprise. In calculating profit per unit, the average (total) cost is subtracted from the average revenue. It is usually more profitable for an enterprise to manufacture the greatest amount of output.
AR = TR/q = p × q/q = p
Where
AR-Average Revenue,
TR-Total Revenue,
P-Price
Q-Quantity.
Marginal revenue: It is defined as the revenue earned from the sale of a new product or unit. In other words, it is the revenue that a company generates when it sells an extra unit. Management uses it to analyze customer demands, plan the production schedules, and set the prices of products.
In accordance with the law of diminishing returns, the margin of revenue remains constant to a certain output level, and slows down as output increases.
MR = Change in total revenue/Change in quantity
Where
MR-Marginal Revenue,
TR-Total Revenue,
Q-Quantity.
FAQs on Concepts of Total Revenue, Average Revenue and Marginal Revenue
1. What is the significance of total revenue?
In order for a company to be profitable, its total revenue is crucial. The lower the revenue, the lower the profit. The greater the profit, the greater the revenue. It is important to be knowledgeable about total revenue before starting a business. Potential profits are another important consideration. In contrast, the relationship between total revenue and price is inverse. Prices increase and decrease total revenue. Price does not affect total revenue, however, if unit elastic demand is present. Demand is elastic or inelastic based on the total revenue generated.
2. What is the Relation Between Total Revenue and Marginal Revenue?
Though revenue includes only money, it is a very valuable factor in the business market. Many other primary and secondary marketplace matters directly or indirectly depend on the revenue. The two most important types of revenue are total revenue and marginal revenue. Total revenue is the total sale price of a whole firm. It is calculated with the price of each product and product quantity. Marginal revenue is the change in total revenue compared to the change in the quantity of product. Marginal revenue is directly related to the total revenue. Suppose the total revenue change is high, the marginal revenue increases. The marginal revenue is directly proportional to the total revenue change.
3. What is charging revenue?
Charging revenue is used to record user financial statements according to Financial Accounting Standards Boards (FASB). It functions as a detection tool for sudden changes in a user's finances or property. The board keeps track of users' financial condition by analysing some information such as customers' contracts, transaction prices, performance obligations, transaction price allocation, entity fulfilments of performance obligations, etc. Therefore, the process of calculating revenue follows the concept of total, average, and marginal revenue.
4. What does the cost and revenue total mean?
Cost and revenue in total are determined by the selling brand qualities. Production and delivery costs are included in revenue costs. In addition to the concept of total revenue, it is mentioned in the company's income statement. Costs are determined by the total revenue of capital corporations.
5.What is the economic concept of total revenue?
Revenue, including total revenue, is the one most commonly discussed in the business market. From the concepts of total, average, and marginal revenue, total revenue is by far the most important. To determine the brand quantity in economics, the whole sales price a firm accounts for is called the total revenue.
6. For the product price of 30 and the quantity of 500, determine the total, average, and marginal revenue?
The following results are obtained by calculating total, average, and marginal revenue:
TR=500*30 =15000
AR=15000/500 =30
MR is not applicable here.