In this post, we discuss in detail what is total revenue formula is, how is revenue calculated, net revenue vs gross revenue, and how to define total revenue using the annual revenue calculator.
Total revenue formula
In the world of economics, total revenue is the amount calculated after the total sales of goods and services of a company. The income statement of a company captures the total revenue.
The next question is, What is the total revenue formula?
What is total revenue formula?
The total revenue formula demands the calculation of the total number of units sold by the company as the first step. The next step in the formula for total revenue is to determine the average price per unit of the goods sold. For finding total revenue, you need to multiply both:
Total revenue = (average price per unit sold) x (number of units sold)
If you are a service-based company, then the total revenue formula is:
Total revenue = (average price per service sold) x (number of services sold)
While calculating the total revenue, the recommendation is to consider all the monetary transactions for accuracy.
Revenue function formula
The most common revenue function formula is that of the total revenue formula which is represented by R=PQ. Here R is the total revenue, P is the price per unit of the product or service sold and Q is the quantity of the product or the service. Ensure to include non-operating revenue in the total revenue calculation such as investment gains or dividend income.
The company’s total annual revenue aids in determining its financial health. An increase in total revenue indicates greater income and hence greater potential to pay off the company’s expenses or liabilities.
Define gross revenue
What is gross revenue meaning and how to calculate gross revenue?
The simplest way to define gross revenue is the total sum of all the money earned by the company. It includes the amount earned from the sale of goods and services, sale of shares, sale of property and equipment, and interest. It is included in the company’s income statement. Under the gross annual revenue head, you can find details of the total income and the expenses that need to be deducted from it to calculate the net revenue or the net income.
The Gross revenue formula is as mentioned below (total revenue minus total cost):
Gross revenue = Total revenue – Cost of Goods Sold
Marginal revenue economics definition
Marginal revenue economics definition is the increase in total revenue due to the sale of 1 additional unit of the product or service. It reflects the incremental variation in the company’s earnings after incurring the sale of 1 additional unit.
The marginal revenue can be the same for a certain period of time for a certain output level, following the law of diminishing returns in economics. Companies who opt to remain competitive in the market and intend to maximize profits will continue to increase the production level till marginal revenue is equal to marginal cost.
Define net revenue formula
Net revenue is the deduction of sales commissions, returns, and discounts from the gross revenue. So after calculating via the total revenue formula, and computing the gross revenue, you need to perform the net revenue calculation as follows:
Net revenue formula or the equation for revenue (net): Gross revenue – discounts – returns – commissions
The deductible part can vary depending on the gross sales made by the company on its products or services. Net revenue is majorly used to report the financial status of a company. It aids to understand what will be the company’s total profit before taking into account the liabilities, taxes, overhead, non-commissioned employee salaries, and expenses. A company’s income statement reflects the net revenue.
Total revenue vs marginal revenue
The total revenue formula considers the entire amount of the total sales of goods and services. In fact, the total revenue equation considers multiplying the average per-unit price with the total number of goods or services sold. Marginal revenue, on the other hand, is the increase in the total revenue function due to the sale of 1 additional unit of product or service.
The importance of total revenue is to understand the difference between the total revenue and total costs. The more is the difference, the more a company can maximize its profits. The importance of marginal revenue is to find out how much a company can increase revenue by selling additional products or services.
In this section, we will now focus on the different revenue equations or revenues formulas involving the total revenue formula, monthly or annual gross revenue, and marginal revenue. These are very important components of a company’s income statement and defines the financial status of a company.
1. How to calculate total revenue?
How to find total revenue? – As a first step, you need to calculate the total number of units sold by your company. It can be products or services. The second step is to determine the average price per unit sold.
Then as per the total revenue economics formula, here is the equation:
Total revenue or sales revenue = Average price per unit sold * number of units sold
In the total revenue formula, interests or dividends are also recommended to add. Any monetary changes in the company’s books must be accounted for under the head of the total revenue calculator.
2. How to calculate net revenue?
To calculate net revenue, as a first step you need to calculate the gross revenue. The gross revenue calculator states,
Gross revenue = Total revenue – Cost of goods sold
Then the second step is to determine the deductions that you need to consider in the net revenue equation. The amount to be accumulated for deductions is from discounts, sales returns, and commissions. They are cumulatively called selling expenses.
The last step is to calculate the net revenue, by subtracting the selling expenses from the gross revenue.
Net revenue = Gross revenue – discounts – returns – commissions
Also read: Business ideas for college students
3. How to find the revenue function?
If you want to know how to find the revenue function, then the simple answer is to multiply the output generated with the price per unit. The output is the number of units sold for a product or service.
The revenue function formula is that of the total revenue formula and is represented by,
R = P X Q, where R is the revenue, P is the average price per unit and Q is the total count of products or services.
4. Marginal revenue calculator
The marginal revenue calculator is to determine the incremental change in the company’s earnings after selling 1 additional unit of product or service. It is calculated by dividing the change in the total revenue by the change in the total quantity of products.
The representation of the marginal revenue equation is,
Marginal revenue = (Change in total revenue) / (change in quantity)
And symbolically represented as, △MR= (△TR/ △Q)
So initially you need to use the total revenue formula accounting to calculate the total revenue and then determine the change in the earnings with respect to the change in the quantity sold.
Also read: Mark to market accounting
5. Maximum revenue formula
Maximum revenue is the total revenue calculated at the maximum demand and maximum price.
The maximum revenue formula is represented as,
R = pQ
Here R is the maximum revenue, p is the price of the good or service at maximum demand and Q is the total quantity of goods or service at maximum demand.
To find out p and Q, you need to use the derivative function. The maximum value of the function occurs when the derivative is 0. So you need to determine the first derivative of the revenue function to calculate the maximum revenue.
Example of total revenue
The total revenue formula states that the average price per unit product or service must be multiplied by the number of products or services sold.
Total revenue = Average price per unit sold * number of units sold
An example of total revenue:
A company is selling 100 units of laptops at an average price per unit of INR 45,000. Here, the total revenue is INR (45000 * 100) = INR 45,00,000. Now if the company sells 50 units of laptops at an average price per unit of INR 30,000. The total revenue will be INR (45,00,000 + 50 * 30,000) = INR 45,00,000 + 15,00,000 = INR 60,00,000.
Net sales vs gross sales
In this section, we will try to understand net sales vs gross sales or net revenue vs gross profit.
Gross sales is the sum total of all the sales transactions made by a company within a particular period of time. Net sales is calculated by deducting the sales returns, discounts, and sales allowances or commissions from the gross sales.
In the world of accounting, the deductions fall under the debit balance or account and the gross sales fall under the credit balance or account. The deductions offset the sales accounts as the accounting formula states debit balance must be equal to the credit balance.
Total revenue curve
A total revenue curve is a technique of representing the total revenue formula graphically. The slope of the total revenue graph is the marginal revenue. The curve for a company with market control (representing monopoly) is shaped like a hump whereas, for a company with no market control, the graph is a straight line or positive.
How to value a company based on revenue?
Answering the question of how to value a company based on revenue, we need to understand whether the company is earning a total revenue greater than the cost of goods sold. Thereby checking the gross profit or revenue of the company. Next is to check whether a company is able to earn higher even after deducting the sales expenses.
What is the formula for net income?
Net income = Total revenue – Cost of goods sold – Expenses
The expenses are usually the operating expenses. If the net income is positive, the conclusion is the company is earning profits. If it’s negative then it is undergoing loss.
Is total revenue the same as sales?
While comparing net revenue vs net sales, the net sales formula includes only the earnings from sales activities. That’s the method to calculate sales revenue. The net revenue however includes activities from sales, earnings from interest, or dividends.
How to figure out gross annual income?
How to find annual income? – You need to multiply the sales price of a product or service by the number of quantities sold. You need to calculate the same for each of the products and then add all the values together to find the business gross income. So there is not much variation in gross income vs revenue.
Kuntala is a versatile writer with a focus on diverse areas around work, productivity, collaboration at work, hiring, management, HR, and training. Her background of past experience in technology and consulting helps in molding razor-sharp insights into the research and user-focused content she creates. Professionally she is an IT consultant in a sales role and also a writer of short stories and poems, travel blogger, and fashion influencer.