IB Docs (2) Team
Total revenue & revenue streams
In 2020, following a year of national lockdowns and government rules for people to stay at home (due to the global COVID-19 pandemic), most businesses suffered huge financial losses. Without adequate revenue and revenue streams, many businesses collapsed. Revenue refers to the money coming into a business from the sale of goods and services. Revenue streams refers to the various sources of revenue for a business.
However, the significant increase in the number of people staying at home and working from home (WFH) throughout 2020 and beyond meant that some businesses thrived. For example, in early 2021, Netflix announced that its total revenues for 2020 were a staggering $25 billion as many more customers signed up to its streaming services. This meant that Netflix earned revenues in excess of $2.85 million per hour throughout 2020!
Total revenue (TR) is the sum of income received by a business from its trading activities. It is calculated by multiplying the unit price (P) of a good or service by the quantity sold (Q), i.e. TR = P × Q. For example, if a campsite operator rents out 100 plots (or sites) at an average price of $45 per day, then its total revenue is $45 × 100 = $4,500 for the day.
Camping site operators earn revenue from campers
Strictly speaking, the above calculation works as the organization sells a single product. In most cases, calculating total revenue is a little more complex because businesses sell a range of goods and/or services at different prices. In such cases, total revenue is calculated as the sum of the sales revenue for each of the firm's products. For example, Apple’s various revenue streams come from the sale of its different products, such as iPhones, iPads, AirPods, Apple TV, MacBook computers, and iTunes sales.
Case Study - Lego
Lego, the Danish toymaker founded in 1935, is the world's biggest toy company as measured by sales revenue. As the chart below shows, the company's sales revenue has grown almost sevenfold over the past two decades, reaching $7.2 billion in 2020.
Source: Statista
Lego, which is Danish to "play well", employs more than 20,000 people and operates more than 700 retail stores worldwide as well as Legoland theme parks in Billund (Denmark), Günzburg (Germany), Windsor (UK), Castelnuovo del Garda (Italy), Florida (USA), California (USA), New York (USA), Nagoya (Japan), Dubai (UAE), and Johor (Malaysia). Despite the COVID-19 global pandemic, Lego achieved double-digit sales and profit growth in both 2020 and 2021.
Average revenue (AR) is the amount a business receives from its customers per unit of a good or service sold. Average revenue is mathematically the same value as the price per unit. This is because:
TR = P × Q
So P = TR ÷ Q
And since AR = TR ÷ Q
AR = P
where:
TR = total revenue
P = price
Q = quantity (output level), and
AR = average revenue
Common error!
A common mistake made by students is to use the words ‘cost’ and ‘price’ synonymously.
“Cost” (or cost of production) is paid by the business, whereas “price” is paid by the customer to purchase the good or service.
The term revenue streams refers to the various sources of revenue for a business. Sales revenue is the most common form of revenue stream for businesses. However, most businesses will have more than one revenue stream (sources of revenue). Examples of various revenue streams include:
transactions fees charged to customers
membership fees
royalties
merchandise sales
sponsorship revenues
subscription charges imposed on customers
dividends from shareholdings in other companies
donations/gifts
interest earnings from cash savings in a bank account
grants and subsidies from the government
Examples of various revenue streams for selected businesses:
Burger King | Holiday Inn Hotel | AMC Cinemas |
Fast food sales | Hotel room hire | Cinema ticket sales |
Franchise licence fees | Room service | Popcorn, hot dogs, and candy |
Royalties from franchisees | Restaurants | Drinks (beverages) |
Rents paid by franchisees | Hotel gift shop | Merchandise |
Case Study 1 - The world's most profitable businesses
The world's largest businesses are able to earn hundreds of billions of dollars annually. The following summarises some of the findings from the Fortune 500 report (for 2019):
70 companies around the world earned over $1 million in profits in one hour or less.
Saudi Aramco is the world’s most profitable company, with profits of $304.04 million per day (or $1 million in just 4.7 minutes!) This is nearly double that of the second-placed Apple.
High Tech companies are among the most profitable companies, with smartphones being key to Apple and Samsung in particular.
With the exception of Samsung, the Asian companies on the list are state-owned Chinese banks.
Rank | Company | Profit per day (USD) | Time taken to earn $1m |
1 | Saudi Aramco | $304.04 million | 4.7 minutes |
2 | Apple | $163.1 million | 8.8 minutes |
3 | Industrial & Commercial Bank of China | $123.29 million | 11.7 minutes |
4 | Samsung Electronics | $109.3 million | 13.2 minutes |
5 | China Construction Bank | $105.48 million | 13.7 minutes |
6 | JPMorgan Chase & Co. | $88.97 million | 16.2 minutes |
7 | Alphabet | $84.21 million | 17.1 minutes |
8 | Agricultural Bank of China | $83.99 million | 17.1 minutes |
9 | Bank of America Corp. | $77.12 million | 18.7 minutes |
10 | Bank of China | $74.59 million | 19.3 minutes |
Source: adapted from Forbes
Case Study 2 - Revenue per minute for the world's top companies
Apart from profit, another way to measure success is in how much sales revenue a business generates on a per minute basis. Below is a selection of high tech companies, ranked by sales revenue per minute in 2021.
Company | Sales revenue per minute |
Amazon | $955,517 |
Apple | $848,090 |
Google (Alphabet) | $433,014 |
Microsoft | $327,823 |
Facebook (Meta) | $213,628 |
Tesla | $81,766 |
Netflix | $50,566 |
Source: adapted from Visual Capitalist
Case Study 3 - The Walt Disney Company
The Walt Disney Company was established in 1923 by Roy Disney (1893 - 1971) and younger brother Walt Disney (1901 - 1966). The company operates six theme parks (which the company calls Disneyland Resorts) across the world:
Disneyland Resort, California, USA
Walt Disney World, Florida, USA
Tokyo Disney Resort, Japan
Disneyland Paris, France
Hong Kong Disneyland Resort, Hong Kong SAR
Shanghai Disney Resort, China
Whilst many people might associate the Walt Disney Company with these theme parks (leisure parks), the company’s sales revenue also includes revenue streams from its many strategic business units such as Disney+ and other television cable channels including ABC Network, ESPN, and The Disney Channel.
The Walt Disney Company also owns film studios including Walt Disney Pictures, Walt Disney Animation Studios, Pixar (bought from Steve Jobs), Marvel Studios (and The Avengers franchise), Lucasfilm (and the Star Wars franchise), 20th Century Studios, Searchlight Pictures, and Blue Sky Studios.
As the world’s largest entertainment company, the Walt Disney Company had sales in excess of $65.388 billion in 2020 – that's more than $179 million per day or in excess of $7.46 million per hour(!)
Case Study 4 - Big Tech, Big Revenue
Many thanks to InThinking Business Management subscriber Nicoleta Ciora for suggesting this resource.
In 2021, the "Big Five" technology giants Apple, Amazon, Alphabet (Google), Meta (Facebook), and Microsoft, generated a combined $1.4 trillion in revenue. That's $1,400,000,000,000 or $3,835,616,438 per day, $159,817,352 per hour or a staggering $2,663,623 per second!
There are two main revenue sources for the Big Five:
Selling you a product (in the case of Apple, Microsoft, and Amazon)
Selling to advertisers (in the case of Alphabet and Meta)*
* Nearly 98% of Meta’s revenue comes from Facebook advertising, and 81% of Google’s revenue comes from advertising on various Google products
Click this link from Visual Capitalist to see an infographic of the various revenue streams from the Big Five.
ATL Activity (Thinking and Communication skills) - Revenue streams for the IBO
With a classmate, discuss five revenue streams for the International Baccalaureate as an organization. Click on the icon after to see some of the possible answers.
Possible revenue streams for the IB would include:
Annual school (membership) fee - all IB World Schools are charged this yearly fee.
Examination fees from candidates - use to pay for the administrative aspects of the IB internal and external assessments.
School authorization fees - charges paid by schools applying to be IB-accredited.
School evaluation (quality assurance) fees - charges paid by IB World Schools to be re-accredited (this happens on a 5-year cycle).
Revenues from IB workshops, i.e. fees paid by schools for sending their teachers to be upskilled on official IB workshops.
Revenues from IB Global Conferences, i.e. charges paid by commercial exhibitors at IB conferences (such as publishers of textbooks and IB-related resources).
Royalties from the IB's partner publishers, such as Oxford University Press (OUP) and Hodder Education, for IB-endorsed publications.
The sale of past examination papers and mark schemes - these publications are copyrighted materials of the IB and only officially sold and distributed by its approved distributor called Follett.
Common error!
Too often, students confuse revenue with profit. Revenue (or sales revenue) is the income a business earns from selling goods and services. From this, it must pay all its costs, such as fixed and variable costs, before a profit can be declared.
Profit exists if there is a positive difference between total revenue (TR) and total costs (TC), i.e. Profit = TR – TC.
To test your understanding of this topic, have a go at the five exam practice questions below.
Exam Practice Question 1 - Pawlyn Drones
Pawlyn Drones is a newly established manufacturer of drones for recreational use. The firm produced 180 drones last month, and sold these for an average price of $230. Pawlyn Drones had average variable costs of $190 per drone. Its fixed costs per month are $4,500.
(a) | Define the term fixed costs. | [2 marks] |
(b) | Calculate the average fixed cost (AFC) for Pawlyn Drones. | [2 marks] |
(c) | Calculate the monthly profit or loss made by Pawlyn Drones | [2 marks] |
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Answers
(a) Define the term fixed costs. [2 marks]
Fixed costs are items of expenditure for a firm that do not change in relation to the level of output or production, such as payment of rent or management salaries.
Award [1 mark] for a limited response that shows some understanding. Award [2 marks] for a clear and accurate definition, similar to the example above.
(b). Calculate the average fixed cost (AFC) for Pawlyn Drones. [2 marks]
AFC = Total fixed costs / Output
AFC = $4,500 / 180 drones = $25
Award [1 mark] for the correct answer and [1 mark] for showing apprpriate working out.
(c) Calculate the monthly profit or loss made by Pawlyn Drones. [2 marks]
Profit (or loss) = Total revenue minus Total costs
Profit (or loss) = ($230 × 180) – [($190 × 180) + $4,500]
= $41,400 – ($34,200 + $4,500)
= $41,400 – $38,700
Profit = $2,700
Alternatively, profit = Total contribution minus Total fixed costs
Total contribution = [($230 – $190) × 180] – $4,500
Profit (or loss) = ($40 × 180) – $4,500
Profit (or loss) = $7,200 – $4,500
Profit = $2,700
Award [1 mark] for the correct answer and [1 mark] for showing appropriate working out.
Exam Practice Question 2 - Tokyo Ceramics
Tokyo Ceramics sells handcrafted cups for $10. The firm's average variable cost is $4 for each cup, and sells 1,200 of these cups per year. The firm has fixed costs of $3,000 per year.
(a) | Calculate the annual sales revenue for Tokyo Ceramics. | [2 marks] |
(b) | Calculate the profit margin (mark-up) on each cup sold by Tokyo Ceramics. | [2 marks] |
(c) | Calculate Tokyo Ceramics' overall profit earned on the sale of these cups. | [2 marks] |
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Answers
(a) Calculate the annual sales revenue for Tokyo Ceramics. [2 marks]
Total revenue = Price × Quantity sold
In annotation, TR = P × Q
TR = $10 × 1,200 = $12,000
Award [1 mark] for the correct answer, and [1 mark] for showing appropriate working out.
(b) Calculate the profit margin (mark-up) on each cup sold by Tokyo Ceramics. [2 marks]
Profit margin = Price minus Average cost (per cup)
In annotation, Profit margin = P – AC
Average cost = Average variable cost + Average fixed cost
In annotation, AC = AFC + AVC
AC = $4 + ($3,000 / 1,200) = $4 + $2.50
Hence, profit margin = $10 – ($4 + $2.50) = $3.50 per cup
Award [1 mark] for the correct answer, and [1 mark] for showing appropriate working out.
(c) Calculate Tokyo Ceramics' overall profit earned on the sale of these cups. [2 marks]
Profit = Total Revenue minus Total Costs
Profit = ($10 × 1,200) – [($4 × 1,200) + $3,000 = $12,000 – ($4,800 + $3,000)
Profit = $12,000 – $7,800 = $4,200
Award [1 mark] for the correct answer, and [1 mark] for showing appropriate working out.
Exam Practice Question 3 - YTF Toys Ltd.
The table below refers to the costs and revenues of YTF Toys Ltd. when operating at 4,000 units of output per month:
Item | Costs & Revenues ($) |
Price | $20 |
Raw materials per unit | $8 |
Rent | $7,000 |
Salaries | $8,000 |
(a) | Calculate the total cost for YTF Toys Ltd. of producing 4,000 units. | [2 marks] |
(b) | Calculate the profit earned by YTF Toys Ltd. if it is able to sell all of its output this month. | [2 marks] |
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Answers
(a) Calculate the total cost for YTF Toys Ltd. of producing 4,000 units. [2 marks]
Total variable costs (TVC) = Raw materials per unit × units of output per month
TVC = $8 × 4,000 = $32,000
Total fixed cost (TFC) = Rent + Salaries
TFC = $7,000 + $8,000 = $15,000
TC = TVC + TFC = $32,000 + $15,000 = $47,000
Therefore, TC for YTF Toys Ltd. of producing 4,000 units = $47,000
Award [1 mark] for the correct answer, and [1 mark] for showing appropriate working out.
(b) Calculate the profit earned by YTF Toys Ltd. if it sells all of its output this month. [2 marks]
Total revenue (TR) = Price × Quantity sold
TR = $20 × 4,000 = $80,000
Profit = TR – TC = $80,000 – $47,000 = $33,000
Hence, the profit earned by YTF Toys Ltd. if it sells 4,000 units this month = $33,000
Award [1 mark] for the correct answer, and [1 mark] for showing appropriate working out.
Apply the own figure rule (error carried forward), where appropriate.
Exam Practice Question 4 - Camiko Facemasks Company
Camiko Facemasks Company (CFMC) has fixed costs of $2,000 and sells 250 units of output per month. Each item costs $15 to make and sells for $25.
(a) | Calculate the total costs per month for CFMC. | [2 marks] |
(b) | Calculate the monthly profit for CFMC. | [2 marks] |
(c) | Calculate the change in the average cost of production for CFMC at 150 units and 300 units of output, and comment on why the unit cost has changed. |
|
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Answers
(a) Calculate the total costs per month for Camiko Facemasks Company. [2 marks]
TC = TVC + TFC, where TVC = AVC × Q
TC = ($15 × 250) + $2,000 = $5,750
Award [1 mark] for the correct answer, and [1 mark] for showing appropriate working out.
(b) Calculate the monthly profit for Camiko Facemasks Company. [2 marks]
Total revenue (TR) = P × Q = $25 × 250 = $6,250
Profit = TR – TC
Hence, the monthly profit for Camiko Company = $6,250 – $5,750 = $500
Award [1 mark] for the correct answer, and [1 mark] for showing appropriate working out.
(c) Calculate the change in the average cost of production for Camiko Facemasks Company at 150 units and 300 units of output, and comment on why the unit cost has changed. [4 marks]
AC = TC / Q
TC at 150 units = ($15 × 150) + $2,000 = $4,250
TC at 300 units = ($15 × 300) + $2,000 = $6,500
AC at 150 units = $4,250 ÷ 150 units = $28.33
AC at 300 units = $6,500 ÷ 300 units = $21.67
If Camiko Facemasks Company can sell 300 units, its fixed costs of $2,000 are spread over more units of output (300 rather than 150). Therefore, by doubling its operations, the company witnesses a fall in its unit costs of production from $28.33 to $21.67. This means that the company is able to benefit from economies of scale, i.e. falling average costs of production as a result of an increase in its output.
Mark as a 2 + 2
Award [1 mark] for the correct answer, and [1 mark] for showing appropriate working out.
Apply the own figure rule (error carried forward), where appropriate.
Award up to [2 marks] for the written commentary, which should make reference to declining average costs (unit costs of production) as the firm increases it level of production (output or sales).
Exam Practice Question 5 - Connie's Candles
Connie's Candles (CC) manufactures its own candles and sells these to retail outlets. The firm has fixed costs of $4,000 each month, which includes rent and management salaries. Its average variable costs are $3 per candle. The firm’s current level of demand is 2,500 candles per month. The average price of its candles is $6.
(a) | Using a relevant example, explain what is meant by a variable cost. | [2 marks] |
(b) | Calculate the firm’s average total costs (ATC) for the month. | [2 marks] |
(c) | Calculate the monthly total costs of production for Connie's Candles. | [2 marks] |
(d) | Calculate the profit if demand for the firm's candles increases to 3,000 units per month. | [2 marks] |
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Answers
(a) Using a relevant example, explain what is meant by a variable cost. [2 marks]
Variable costs are those that change directly with a firm’s level of output. For example, Connie's Candles will need to pay for the purchase of materials to make its candles. So, the more candles the firm produces or sells, the higher the variable costs of production will be.
Award [1 mark] for a vague explanation that shows some understanding of the term fixed costs. Award [2 marks] for an accurate explanation of fixed costs, similar to the example above.
(b) Calculate the firm’s average total costs (ATC) for the month. [2 marks]
ATC = TC/Q where TC = TFC + TVC
ATC = ($3 × 2,500) + $4,000] ÷ 2,500 = $4.60
Award [1 mark] for the correct answer and [1 mark] for showing appropriate working out.
(c) Calculate the monthly total costs of production for Connie's Candles. [2 marks]
TC = TFC + TVC = $4,000 + ($3 × 2,500) = $11,500
orTC = ATC × Q = $4.6 × 2,500 = $11,500
Award [1 mark] for the correct answer and [1 mark] for showing appropriate working out.
(d) Calculate the profit if demand for the firm's candles increases to 3,000 units per month. [2 marks]
Profit = Contribution – Total fixed costs
Profit = [($6 – $3) × 3,000] – $4,000 = $5,000
Award [1 mark] for the correct answer and [1 mark] for showing appropriate working out.
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