"Total Revenue and Total Costs"

Total Revenue and Total Costs

Total Revenue

What is Revenue?

Revenue (sometimes called sales) is the money generated from normal business operations, calculated as the average sales price times the number of units sold. So if you are own a gas station and you are selling soda, tea, water, and energy drinks for 1.25 X 200 or 1,750 per week.

What is Profit?

Profit is the total revenue minus the expenses directly related to the production of goods for sale. So in our gas station example it would be the $`1,750 minus the cost of the drinks, the wages of the cashier, and the electricity to light the gas station and keep the drinks cold.

What is Cost?

Cost is all of the cost to produce and sell the product. So if we looked at the drinks again, it would be all the costs with production, the packaging, the shipping to the gas station and then the costs mentioned above like the wages of the cashier and the electricity.

There are different kinds of costs. Fixed costs do not change as a company produces more or less products or provides more or fewer services. An example is the rent of your building, it is the same each month no matter how many products you produce or sell. Variable costs depend on the number of goods or services that your business produces. Variable costs change based on production volume. An example of a variable cost is the raw materials needed to make the product.

In economic analysis, you assume that the goal of a business is to maximize its profits. This means that a firm wants to earn the highest profit that it can using the resources that it has. Suppose that you are running a coffee shop. Your goal as a business owner is to earn as much profit as you can. Your profit is the difference between how much you earn by selling coffee and how much you pay to produce the coffee that you sell. To determine the amount of your shop’s profit, you will need to know your total revenue and total cost.

The total revenue is the amount of income that your coffee shop receives from the sale of coffee. It is equal to the price of a cup of coffee multiplied by the number of cups of coffee that you sell. Suppose that you sell each cup of coffee for `$3 and you sell 1,000 cups of coffee each month. Your total revenue for the month can be calculated as:

Total Revenue = Price × Quantity Sold = 3,000

Total Costs

The total cost includes all of the money that a firm spends to produce its goods. This cost is calculated by adding a firm’s variable costs to its fixed costs. Suppose that each month, you must pay 1.50 per cup of coffee sold. This would include the cost of things such as cups and coffee beans, which change as you produce more or less cups of coffee. To sell 1,000 cups of coffee, your total variable cost will be $`1,500. By adding together your fixed and variable costs, you will get your total cost:

Total Cost = Total Fixed Cost + Total Variable Cost = $500 + $1,500 = `$2,000

The difference between your total revenue and total cost is the coffee shop’s profit or loss:

Profit or Loss = Total Revenue – Total Cost = 2,000 = 1,000

Your coffee shop has earned $1,000 in profit. In general, when the total revenue minus the total cost is positive, the firm has earned a profit. When the total revenue is less than the total cost, the firm has incurred a loss.

The total revenue and the total cost give you a way to see how a firm is doing overall in terms of earning a profit or incurring a loss. When making decisions about whether or not producing more of a good will be beneficial (i.e., increases profit), businesses use marginal analysis. Marginal analysis is the additional benefit to produce more product when compared to the additional cost to produce more product. The next section discusses marginal analysis.