How to Calculate Sales Revenue: Definition & Formula

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  • 0:04 What is Sales Revenue
  • 0:59 Calculating Sales Revenue
  • 2:36 Understanding Relevance
  • 3:05 Lesson Summary
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Lesson Transcript
Instructor
Tara Schofield

Tara has a PhD in Marketing & Management

Expert Contributor
Joseph Shinn

Joe has a PhD in Economics from Temple University and has been teaching college-level courses for 10 years.

This lesson discusses the importance of sales revenue, explains how sales revenue is calculated, and analyzes how sales revenue can affect the money a business has available.

What is Sales Revenue?

Regardless of what industry or type of business a company operates, it must earn money to be profitable. Sales revenue is the amount of money that is brought into the business from the sales of products and/or services over a period of time.

If sales revenue goes down, it can affect all aspects of the company. If the amount of money coming into the business decreases, other cuts must be made in payroll, expenses, and resources. Likewise, when sales revenue increases, more money is coming into the business, and extra cash flow may be available for debt reduction, expansion, and perks for the employees.

One of the greatest challenges of business owners is to understand the importance of sales in their company. Especially in the case of a sole proprietor, the owner may think their role is to provide a service. However, their main role is to generate sales revenue. That is accomplished through the service they provide or the products they sell.

Calculating Sales Revenue

The sales revenue calculation is very simple. It is the number of a product sold multiplied by the sales amount of that item:

Sales Revenue = Units Sold x Sales Price

Let's say you are selling sets of pots and pans. Your pots and pans are special, they have many features that competitors don't offer and have more pieces than typically found in pots and pans sets. Because you have exceptional products, you are able to charge a premium price for your sets. Last year you sold 500 sets of pots and pans for $350 each.

In this example, your sales revenue is found by the following formula:

Sales Revenue = 500 x $350

Sales Revenue = $175,000

If your sales drop this year to only 400 units, there will be a negative effect on your sales revenue:

Sales Revenue = 400 x $350

Sales Revenue = $140,000

By selling 100 units less in a year, your sales revenue drops by $35,000 this year.

However, if your sales increase this year to 600 units, there will be a positive effect on your sales revenue:

Sales Revenue = 600 x $350

Sales Revenue = $210,000

By selling 100 units more in a year, your sales revenue increases by $35,000. That's $35,000 more money available for business needs and may allow you to give yourself a pay raise!

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Additional Activities

Additional Problems of Calculating Sales Revenue

Question 1:

Consider a firm that sells pens and pencils. Each pen is sold for $0.25 and each pencil is sold for $0.50. If the firm sells 100 pencils and 300 pens, what is the total sales revenue that they are collecting?


Question 2:

In year 1, the firm sold 300 units of its product at $5 per unit. In year 2, the price decreased to $4 per unit, but the firm increased the number of units sold to 400 units.

  • What was the firm's total revenue in year 1?
  • What was the firm's total revenue in year 2?
  • What was the percentage change in the firm's total revenue from year 1 to year 2?


Question 3:

Funky Frisbee Co sold 500 Frisbees in the previous month for $30 each. However, 50 were returned because they didn't fly right. What was Funky Frisbees net sales revenue?


Question 4:

Quick Car Co sells the following vehicles, here are the types and list prices:

Compact: $18,000

Mid-size: $28,000

SUV : $32,000

Truck: $45,000

Quick sold 55 compacts, 76 mid-size, 110 SUV and 105 trucks last month. What is their total sales revenue?

A new advertising campaign for trucks starts the following month, If truck sales increase by 20 vehicles, what will the new sales revenue be?

Solutions

Solution to Question 1: The total revenue can be calculated by multiplying the prices of pens and pencils by their respective quantities and summing these two values together.

TR = TRpens + TRpencils

TR = (Pricepens + Quantitypens ) + (Pricepencils + Quantitypencils )

TR = (0.50 * 300) + (0.25 * 100)

TR = 150 + 25

TR = 175


Solution to Question 2

  • What was the firm's total revenue in year 1? $1,500

TR1 = P1 * Q1

TR1 = 5 * 300

TR1 = 1,500

  • What was the firm's total revenue in year 2? $1,600

TR2 = P2 * Q2

TR2 = 4 * 400

TR2 = 1,600

  • What was the percentage change in the firm's total revenue from year 1 to year 2? +6.7%

ΔTR = ((TR2/TR1) - 1) * 100

ΔTR = ((1,600)/(1,500) - 1) * 100

ΔTR = 0.067 * 100

ΔTR = 6.7

Question 3. (500 - 50) * 30 = $13,500


Question 4

55 * $18,000 = $990,000

76 * $28,000 = $2,128,000

110 * $32,000 = $3,520,000

105 * $45,000 = $4,725,000

Total = $11,363,000

Increase will be 20 * $45,000 = $900,000. New total = $12,263,000

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