Final answer:
To allocate revenue based on fixed costs and PTR, a firm must analyze and categorize costs, cover fixed costs first, then assess profitability against variable costs while considering the long-run perspective of the market structure and potential growth.
Step-by-step explanation:
Allocating revenue based on fixed costs and Price to Earnings Ratio (PTR) involves analyzing both the cost structure and revenue streams of a firm to maximize profits. To begin with, firms need to understand the relationship between production and costs by categorizing costs into fixed and variable. Fixed costs remain constant regardless of the output level, while variable costs fluctuate with the level of production. Knowing each type of cost is crucial for determining average total costs and marginal costs, which in turn help in calculating profits by comparing them to total revenue.
In the context of revenue allocation, fixed costs are usually covered first since they must be paid irrespective of the business volume. Subsequent revenue can then be evaluated against variable costs to assess profitability. The management must also understand the concept of marginal cost and how it interacts with the PTR to ensure informed decision-making for long-term profitability. This process requires deep knowledge of the market structure in which a firm operates as well as its cost structure, especially from a long-run perspective, where scalability and the potential for growth are considered along with cost factors.