UNIT 1: LINEAR EQUATIONS AND THEIR INTERPRETATIVE UNIT 1: LINEAR EQUATIONS AND THEIR INTERPRETATIVE

APPLICATIONS IN BUSINESS APPLICATIONS IN BUSINESS

Contents Contents
1.0 Aims and Objectives 1.0 Aims and Objectives
1.1 Introduction 1.1 Introduction
1.2 Linear equations 1.2 Linear equations
1.2.1 Developing equation of a line 1.2.1 Developing equation of a line
1.2.2 Special formats 1.2.2 Special formats
1. Application of linear equations 1. Application of linear equations
1..1 Linear cost!output relations"ips 1..1 Linear cost!output relations"ips
1..2 #rea$!even anal%sis 1..2 #rea$!even anal%sis
1.& 'odel e(amination questions 1.& 'odel e(amination questions
1.0AIMS AND OBJECTIVES 1.0AIMS AND OBJECTIVES
After reading t"e c"apter students must be able to) After reading t"e c"apter students must be able to)
define algebraic e(pression* equation + linear equation define algebraic e(pression* equation + linear equation
e(plain t"e different ,a%s of formulating or developing equations of a e(plain t"e different ,a%s of formulating or developing equations of a
line line
understand t"e brea$even point and its application understand t"e brea$even point and its application
define t"e cost output relation s"ip define t"e cost output relation s"ip
e(plain t"e different cost elements e(plain t"e different cost elements
1.1 INTRODUCTION 1.1 INTRODUCTION
'at"ematics* old and ne,l% created* coupled ,it" innovative applications of t"e rapidl% 'at"ematics* old and ne,l% created* coupled ,it" innovative applications of t"e rapidl%
evolving electronic computer and directed to,ard management problems* resulted in a evolving electronic computer and directed to,ard management problems* resulted in a
ne, field of stud% called quantitative met"ods* ,"ic" "as become part of t"e curriculum ne, field of stud% called quantitative met"ods* ,"ic" "as become part of t"e curriculum
of colleges of business. -"e importance of quantitative approac"es to management of colleges of business. -"e importance of quantitative approac"es to management
problems is no, ,idel% accepted and a course in mat"ematics* ,it" management problems is no, ,idel% accepted and a course in mat"ematics* ,it" management
applications is included in t"e core of subjects studied b% almost all management applications is included in t"e core of subjects studied b% almost all management
1
students. -"is manual develops mat"ematics in t"e applied conte(t required for an students. -"is manual develops mat"ematics in t"e applied conte(t required for an
understanding of t"e quantitative approac" to management problems. understanding of t"e quantitative approac" to management problems.
1.2 Line! E"#tions 1.2 Line! E"#tions
Equation Equation: : ! A mat"ematical statement ,"ic" indicates t,o algebraic e(pressions are ! A mat"ematical statement ,"ic" indicates t,o algebraic e(pressions are
equal equal
.(ample) .(ample) / 0 21 2 / 0 21 2
Algebraic expressions Algebraic expressions) ! A mat"ematical statement indicating t"at numerical quantities ) ! A mat"ematical statement indicating t"at numerical quantities
are lin$ed b% mat"ematical operations. are lin$ed b% mat"ematical operations.
.(ample) .(ample) 1 2 2 1 2 2
Linear equations: - Linear equations: - are equations ,it" a variable + a constant ,it" degree one. are equations ,it" a variable + a constant ,it" degree one.
! ! Are equations ,"ose terms 3t"e parts separated b% 2* !* 0 signs4 Are equations ,"ose terms 3t"e parts separated b% 2* !* 0 signs4
! ! Are a constant* or a constant times one variable to t"e first po,er Are a constant* or a constant times one variable to t"e first po,er
.(ample) .(ample) 21 5 / 0 6 21 5 / 0 6
! t"e degree 3t"e po,er4 of t"e variables is 1 ! t"e degree 3t"e po,er4 of t"e variables is 1
! t"e constant or t"e fi(ed value is 6 ! t"e constant or t"e fi(ed value is 6
! t"e terms of t"e equation are 21 and / separated b% 5 sign ! t"e terms of t"e equation are 21 and / separated b% 5 sign
7o,ever 21 2 1/ 0 6 isn8t a linear equation* because 1/ is a constant times t"e 7o,ever 21 2 1/ 0 6 isn8t a linear equation* because 1/ is a constant times t"e
product of 2 variables. product of 2 variables.
9 :o 1 9 :o 1
2 2
terms* :o 1;/ terms* and no 1/ terms are allo,ed. terms* :o 1;/ terms* and no 1/ terms are allo,ed.
! ! Linear equations are equations ,"ose slope is constant t"roug"out t"e line. Linear equations are equations ,"ose slope is constant t"roug"out t"e line.
! ! -"e general notion of a linear equation is e(pressed in a form / 0 m( 2 b ,"ere -"e general notion of a linear equation is e(pressed in a form / 0 m( 2 b ,"ere
m 0 slope* b 0 t"e /! intercept* / 0 dependent variable and 1 0 independent m 0 slope* b 0 t"e /! intercept* / 0 dependent variable and 1 0 independent
variable. variable.
If / represents -otal <ost* t"e cost is increased b% t"e rate of t"e amount of t"e slope m. If / represents -otal <ost* t"e cost is increased b% t"e rate of t"e amount of t"e slope m.
Slope 3m4 0 Slope 3m4 0
( )
1 2
1 2
X X
Y Y
run
fall rise
X
Y

= =

if 1 if 1
1 1
1 1
2 2
Slope measures t"e steepness of a line. -"e larger t"e slope t"e more steep 3steeper4 t"e Slope measures t"e steepness of a line. -"e larger t"e slope t"e more steep 3steeper4 t"e
line is* bot" in value and in absolute value. line is* bot" in value and in absolute value.
2
/ / / / m 0 undefined m 0 undefined
2ive slope 2ive slope
m 0 0 m 0 0
!ve slope !ve slope
1 1 1 1
! ! A line t"at is parallel to t"e 1!a(is is t"e gentlest of all lines i.e. m 0 0 A line t"at is parallel to t"e 1!a(is is t"e gentlest of all lines i.e. m 0 0
! ! A line t"at is parallel to t"e /!a(is is t"e steepest of all lines i.e. m 0 undefined or A line t"at is parallel to t"e /!a(is is t"e steepest of all lines i.e. m 0 undefined or
infinite. infinite.
-"e slope of a line is defined as t"e c"ange!ta$ing place along t"e vertical a(is relative to -"e slope of a line is defined as t"e c"ange!ta$ing place along t"e vertical a(is relative to
t"e corresponding c"ange ta$ing place along t"e "ori=ontal a(is* or t"e c"ange in t"e t"e corresponding c"ange ta$ing place along t"e "ori=ontal a(is* or t"e c"ange in t"e
value of / relative to a one!unit c"ange in t"e value of 1. value of / relative to a one!unit c"ange in t"e value of 1.
1.2.1 Developing equation of a line 1.2.1 Developing equation of a line
-"ere are at least t"ree ,a%s of developing t"e equation of a line. -"ese are) -"ere are at least t"ree ,a%s of developing t"e equation of a line. -"ese are)
1. 1. -"e slope!intercept form -"e slope!intercept form
2. 2. -"e slope!point form -"e slope!point form
. . -,o!point form -,o!point form
1. T$e s%o&e'inte!(e&t )o!* 1. T$e s%o&e'inte!(e&t )o!*
-"is ,a% of developing t"e equation of a line involves t"e use of t"e slope + t"e -"is ,a% of developing t"e equation of a line involves t"e use of t"e slope + t"e
intercept to formulate t"e equation. intercept to formulate t"e equation.
Often t"e slope + t"e /!intercept for a specific linear function are obtained directl% from Often t"e slope + t"e /!intercept for a specific linear function are obtained directl% from
t"e description of t"e situation ,e ,is" to model. t"e description of t"e situation ,e ,is" to model.
.(ample > 1 .(ample > 1
?iven Slope 0 10 ?iven Slope 0 10
/!intercept 0 220* t"en /!intercept 0 220* t"en
Slope!intercept form) t"e equation of a line ,it" slope 0 m and /!intercept b is Slope!intercept form) t"e equation of a line ,it" slope 0 m and /!intercept b is
/ 0 m( 2 b / 0 m( 2 b
/ 0 101 2 20 / 0 101 2 20

Interpretative Exercises Interpretative Exercises

>2 Suppose t"e @i(ed cost 3setup cost4 for producing product 1 be br. 2000. After setup >2 Suppose t"e @i(ed cost 3setup cost4 for producing product 1 be br. 2000. After setup
it costs br. 10 per 1 produced. If t"e total cost is represented b% /) it costs br. 10 per 1 produced. If t"e total cost is represented b% /)
1. 1. Arite t"e equation of t"is relations"ip in slope!intercept form. Arite t"e equation of t"is relations"ip in slope!intercept form.
2. 2. State t"e slope of t"e line + interpret t"e number State t"e slope of t"e line + interpret t"e number
. . State t"e /!intercept of t"e line + interpret t"e number State t"e /!intercept of t"e line + interpret t"e number
>. A sales man "as a fi(ed salar% of br. 200 a ,ee$ In additionB "e receives a sales >. A sales man "as a fi(ed salar% of br. 200 a ,ee$ In additionB "e receives a sales
commission t"at is 20C of "is total volume of sales. State t"e relations"ip bet,een t"e commission t"at is 20C of "is total volume of sales. State t"e relations"ip bet,een t"e
sales man8s total ,ee$l% salar% + "is sales for t"e ,ee$. sales man8s total ,ee$l% salar% + "is sales for t"e ,ee$.
Ans,er Ans,er / 0 0.201 2 200 / 0 0.201 2 200
2. T$e s%o&e &oint )o!* 2. T$e s%o&e &oint )o!*
-"e equation of a non!vertical line* L* of slope* m* t"at passes t"roug" t"e point 31 -"e equation of a non!vertical line* L* of slope* m* t"at passes t"roug" t"e point 31
1 1* / * /
1 14 4
is ) defined b% t"e formula / 5 / is ) defined b% t"e formula / 5 /
1 1 0 m 31 5 1 0 m 31 5 1
1 14 4
/ 5 / / 5 /
1 1 0 m 31 5 1 0 m 31 5 1
1 14 4
.(ample >1 .(ample >1 / 5 2 0 & 31 5 14 / 5 2 0 & 31 5 14
?iven* slop 0 & and / 5 2 0 &1 ! & ?iven* slop 0 & and / 5 2 0 &1 ! &
Doint 0 31* 24 / 0 &1 5 2 Doint 0 31* 24 / 0 &1 5 2
>2 A sales man earns a ,ee$l% basic salar% plus a sales commission of 20C of "is total >2 A sales man earns a ,ee$l% basic salar% plus a sales commission of 20C of "is total
sales. A"en "is total ,ee$l% sales total br. 1000* "is total salar% for t"e ,ee$ is &00. sales. A"en "is total ,ee$l% sales total br. 1000* "is total salar% for t"e ,ee$ is &00.
derive t"e formula describing t"e relations"ip bet,een total salar% and sales. derive t"e formula describing t"e relations"ip bet,een total salar% and sales.
Ans,er Ans,er / 0 0.21 2 200 / 0 0.21 2 200
> If t"e relations"ip bet,een -otal <ost and t"e number of units made is linear* + if > If t"e relations"ip bet,een -otal <ost and t"e number of units made is linear* + if
costs increases b% br. 6.00 for eac" additional unit made* and if t"e -otal <ost of 10 units costs increases b% br. 6.00 for eac" additional unit made* and if t"e -otal <ost of 10 units
is br. 1E0.00. @ind t"e equation of t"e relations"ip bet,een -otal <ost 3/4 + number of is br. 1E0.00. @ind t"e equation of t"e relations"ip bet,een -otal <ost 3/4 + number of
units made 314 units made 314
Ans,er) Ans,er) / 0 61 2 110 / 0 61 2 110
+. T,o'&oint )o!* +. T,o'&oint )o!*
-,o points completel% determine a straig"t line + of course* t"e% determine t"e slope of -,o points completel% determine a straig"t line + of course* t"e% determine t"e slope of
t"e line. 7ence ,e can first compute t"e slope* t"en use t"is value of m toget"er ,it" t"e line. 7ence ,e can first compute t"e slope* t"en use t"is value of m toget"er ,it"
&
eit"er point in t"e point!slope form / 5 / eit"er point in t"e point!slope form / 5 /
1 1 0 m 31 5 1 0 m 31 5 1
1 14 to generate t"e equation of a 4 to generate t"e equation of a
line. line.
#% "aving t,o coordinate of a line ,e can determine t"e equation of t"e line. #% "aving t,o coordinate of a line ,e can determine t"e equation of t"e line.
-,o point form of linear equation) 3/ 5 / -,o point form of linear equation) 3/ 5 /
1 14 0 4 0
( )
1
1 2
1 2
X X
X X
Y Y

.(ample >1 .(ample >1 given 31* 104 + 3F* 04 given 31* 104 + 3F* 04
@irst slope 0 @irst slope 0
2
G
10
1 F
10 0
=

* t"en * t"en
/ 5 / / 5 /
1 1 0 m 31 5 1 0 m 31 5 1
1 14 4 / 5 10 0 !2 31 5 14 / 5 10 0 !2 31 5 14
/ 5 10 0 !21 2 2 / 5 10 0 !21 2 2
/ 0 !21 2 12 / 0 !21 2 12
>2 A salesman "as a basic salar% +* in addition* receives a commission ,"ic" is a fi(ed >2 A salesman "as a basic salar% +* in addition* receives a commission ,"ic" is a fi(ed
percentage of "is sales volume. A"en "is ,ee$l% sales are #r. 1000* "is total salar% is br. percentage of "is sales volume. A"en "is ,ee$l% sales are #r. 1000* "is total salar% is br.
&00. A"en "is ,ee$l% sales are G00.00* "is total salar% is br. 00. Determine "is basic &00. A"en "is ,ee$l% sales are G00.00* "is total salar% is br. 00. Determine "is basic
salar% + "is commission percentage + e(press t"e relations"ip bet,een sales + salar% in salar% + "is commission percentage + e(press t"e relations"ip bet,een sales + salar% in
equation form. equation form.
Ans,er) Ans,er) / 0 0.21 2 200 / 0 0.21 2 200
> A printer costs a price of birr 1*&00 for printing 100 copies of a report + br. 000 for > A printer costs a price of birr 1*&00 for printing 100 copies of a report + br. 000 for
printing G00 copies. Assuming a linear relations"ip ,"at ,ould be t"e price for printing printing G00 copies. Assuming a linear relations"ip ,"at ,ould be t"e price for printing
00 copiesH 00 copiesH
Ans,er) Ans,er) / 0 &1 2 1000 / 0 &1 2 1000
<ost 0 &.0 3004 2 1000 0 br. <ost 0 &.0 3004 2 1000 0 br. 2200 2200
1.2.2 Special formats 1.2.2 Special formats
a !ori"ontal # vertical lines a !ori"ontal # vertical lines
A"en t"e equation of a line is to be determined from t,o given points* it is a good idea to A"en t"e equation of a line is to be determined from t,o given points* it is a good idea to
compare corresponding coordinates because if t"e / values are t"e same t"e line is compare corresponding coordinates because if t"e / values are t"e same t"e line is
"ori=ontal + if t"e 1 values are t"e same t"e line is vertical "ori=ontal + if t"e 1 values are t"e same t"e line is vertical
.(ample) 1 .(ample) 1 ?iven t"e points 3* F4 + 3E* F4 t"e line t"roug" t"em is "ori=ontal because ?iven t"e points 3* F4 + 3E* F4 t"e line t"roug" t"em is "ori=ontal because
bot" /!coordinates are t"e same i.e. F bot" /!coordinates are t"e same i.e. F

G
-"e equation of t"e line becomes / 0 F*,"ic" is different from t"e form / 0 m( 2 b -"e equation of t"e line becomes / 0 F*,"ic" is different from t"e form / 0 m( 2 b
If t"e 1!coordinates of t"e t,o different points are equal If t"e 1!coordinates of t"e t,o different points are equal

.(ample .(ample 3G* 24 + 3G* 124 t"e line t"roug" t"em is vertical* + its equations is 1 0 G i.e. 3G* 24 + 3G* 124 t"e line t"roug" t"em is vertical* + its equations is 1 0 G i.e.
1 is equal to a constant. If ,e proceed to appl% t"e point slope procedure* ,e ,ould 1 is equal to a constant. If ,e proceed to appl% t"e point slope procedure* ,e ,ould
obtain. obtain.
Slope 3'4 0 Slope 3'4 0
= =

0
2
G G
10 12
+ if m 0 + if m 0 infinite t"e line is vertical + t"e form of infinite t"e line is vertical + t"e form of
t"e equation is) 1 0 constant t"e equation is) 1 0 constant
b $arallel # perpen%icular lines & b $arallel # perpen%icular lines &// // an% an%
-,o lines are parallel if t"e t,o lines "ave t"e same slope* + t,o lines are perpendicular -,o lines are parallel if t"e t,o lines "ave t"e same slope* + t,o lines are perpendicular
if t"e product of t"eir slope is 51 or t"e slope of one is t"e negative reciprocal of t"e slope if t"e product of t"eir slope is 51 or t"e slope of one is t"e negative reciprocal of t"e slope
of t"e ot"er. 7o,ever* for vertical + "ori=ontal lines. 3-"e% are perpendicular to eac" of t"e ot"er. 7o,ever* for vertical + "ori=ontal lines. 3-"e% are perpendicular to eac"
ot"er4* t"is rule of ' ot"er4* t"is rule of '
1 1 3t"e first slope4 times ' 3t"e first slope4 times '
2 2 3t"e second slope4 equals 51 doesn8t "old 3t"e second slope4 equals 51 doesn8t "old
true. i.e. ' true. i.e. '
1 1 ( ' ( '
2 2 !1 !1
.(ample) .(ample) / 0 21 5 10 + / 0 21 2 1& are parallel because t"eir slope are equal i.e. 2 / 0 21 5 10 + / 0 21 2 1& are parallel because t"eir slope are equal i.e. 2
/ 0 ;21 2 10 + / 0 !2;1 2 100 are perpendicular to eac" ot"er because t"e / 0 ;21 2 10 + / 0 !2;1 2 100 are perpendicular to eac" ot"er because t"e
multiplication result of t"e t,o slope are 51 i.e. multiplication result of t"e t,o slope are 51 i.e.
1

2
2

x
c Lines t'roug' t'e origin c Lines t'roug' t'e origin
An% equation in t"e variables 1 + / t"at "as no constant term ot"er t"an =ero ,ill "ave a An% equation in t"e variables 1 + / t"at "as no constant term ot"er t"an =ero ,ill "ave a
grap" t"at passes t"roug" t"e origin. Or* a line ,"ic" passes t"roug" t"e origin "as an 1! grap" t"at passes t"roug" t"e origin. Or* a line ,"ic" passes t"roug" t"e origin "as an 1!
intercept of 30* 04 i.e. bot" 1 and / intercepts are =ero. intercept of 30* 04 i.e. bot" 1 and / intercepts are =ero.
F
1.+ A&&%i(tion o) %ine! e"#tions 1.+ A&&%i(tion o) %ine! e"#tions
1.(.1 linear cost output relations'ips 1.(.1 linear cost output relations'ips 5 I<* @<* -<* A<* '<* -J* 5 I<* @<* -<* A<* '<* -J* ) )
-J;-< profit -J -< 0 -I< 2 -@< -J;-< profit -J -< 0 -I< 2 -@<
Or -D region -J 0 DK Or -D region -J 0 DK
-< -D 0 -J ! -< -< -D 0 -J ! -<
Loss - Loss -
region . #.D region . #.D 0 DK 5 3I< 2 @<4 0 DK 5 3I< 2 @<4
-I< 7 -I< 7
A @ ? @< 0 DK 5 K.I< ! -@< A @ ? @< 0 DK 5 K.I< ! -@<
-< -<
-@< 0 -@< 0 K 3D 5 I<4 ! @< K 3D 5 I<4 ! @<
# < D ?3:o of units4 # < D ?3:o of units4
A"ere K 0 units A"ere K 0 units
product + units product + units
sold in revenue sold in revenue
-< 0 -otal <ost -< 0 -otal <ost
@< 0 @i(ed <ost @< 0 @i(ed <ost
I< 0 Lnit variable I< 0 Lnit variable
<ost <ost
Interpretation of t'e grap': Interpretation of t'e grap':
1. 1. -"e vertical distance bet,een A#* @<* ?D is t"e same because @i(ed <ost is t"e -"e vertical distance bet,een A#* @<* ?D is t"e same because @i(ed <ost is t"e
same at an% levels of output. same at an% levels of output.
2. 2. -"ere is no revenue ,it"out sales 3because -otal Jevenue function passes -"ere is no revenue ,it"out sales 3because -otal Jevenue function passes
t"roug" t"e origin4* but t"ere is cost ,it"out production 3because of @i(ed <ost4 t"roug" t"e origin4* but t"ere is cost ,it"out production 3because of @i(ed <ost4
+ t"e -< function starts from A + doesn8t pass t"roug" t"e origin + t"e -< function starts from A + doesn8t pass t"roug" t"e origin
. . Lp to point -* -otal <ost is greater t"an -otal Jevenue Lp to point -* -otal <ost is greater t"an -otal Jevenue results in loss. A"ile at results in loss. A"ile at
point -* 3-otal Jevenue 0 -otal <ost4 i.e. #rea$even. 30 profit4* + above point -* point -* 3-otal Jevenue 0 -otal <ost4 i.e. #rea$even. 30 profit4* + above point -*
-J M -< -J M -< 2ve profit. 2ve profit.
&. &. -@< remains constant regardless of t"e number of units produced. ?iven t"at -@< remains constant regardless of t"e number of units produced. ?iven t"at
t"ere is no an% difference in scale of production. t"ere is no an% difference in scale of production.
6
G. G. As production increases* -otal Iariable <ost increases at t"e same rate and As production increases* -otal Iariable <ost increases at t"e same rate and
'arginal cost is equal ,it" Lnit Iariable <ost 3 'arginal cost is equal ,it" Lnit Iariable <ost 3'< 0 I<4 '< 0 I<4 onl% in linear onl% in linear
equations. equations.
F. F. As production increases -< increases b% t"e rate equal to t"e AI< 0 '< As production increases -< increases b% t"e rate equal to t"e AI< 0 '<
3average cost equal to marginal cost4 3average cost equal to marginal cost4
6. 6. AI< is t"e same t"roug" out an% level of production* "o,ever Average @i(ed AI< is t"e same t"roug" out an% level of production* "o,ever Average @i(ed
<ost 3A@<4 decreases ,"en Kuantit% increases + ultimatel% A-< decreases ,"en <ost 3A@<4 decreases ,"en Kuantit% increases + ultimatel% A-< decreases ,"en
K increases because of t"e effect of t"e decrease in A@<. K increases because of t"e effect of t"e decrease in A@<.
E. E. As Kuantit% increases -J increases at a rate of D. and average revenue remains As Kuantit% increases -J increases at a rate of D. and average revenue remains
constant. constant.
AJ 0 AJ 0
Q
Q P
Q
TR .
=
0 D 0 D AJ 0 D in linear functions AJ 0 D in linear functions
1.2.2 B!e-e.en An%/sis 1.2.2 B!e-e.en An%/sis
#rea$!even point is t"e point at ,"ic" t"ere is no loss or profit to t"e compan%. It can be #rea$!even point is t"e point at ,"ic" t"ere is no loss or profit to t"e compan%. It can be
e(pressed as eit"er in terms of production quantit% or revenue level depending on "o, e(pressed as eit"er in terms of production quantit% or revenue level depending on "o,
t"e compan% states its cost equation. t"e compan% states its cost equation.
'anufacturing companies usuall% state t"eir cost equation in terms of quantit% 3because 'anufacturing companies usuall% state t"eir cost equation in terms of quantit% 3because
t"e% produce and sell4 ,"ere as retail business state t"eir cost equation in terms of t"e% produce and sell4 ,"ere as retail business state t"eir cost equation in terms of
revenue 3because t"e% purc"ase and sell4 revenue 3because t"e% purc"ase and sell4
Cse 1: Mn#)(t#!in0 Co*&nies Cse 1: Mn#)(t#!in0 Co*&nies
<onsider a <ompan% ,it" equation <onsider a <ompan% ,it" equation
-< 0 I< 2 @< ; -otal cost 0 Iariable cost 2 @i(ed cost -< 0 I< 2 @< ; -otal cost 0 Iariable cost 2 @i(ed cost
-J 0 DK; -otal Jevenue 0 Drice ( Kuantit% -J 0 DK; -otal Jevenue 0 Drice ( Kuantit%

At #rea$!even point* -J 0 -< i.e -J 5 -< 0 0 At #rea$!even point* -J 0 -< i.e -J 5 -< 0 0
DK 0 I< 2 @< ,"ere Ke 0 #rea$even Kuantit% DK 0 I< 2 @< ,"ere Ke 0 #rea$even Kuantit%
DK 5 I<.K 0 @< @< 0 @i(ed cost DK 5 I<.K 0 @< @< 0 @i(ed cost
K 3D 5 I<4 0 @< D 0 unit selling price K 3D 5 I<4 0 @< D 0 unit selling price
E
Ke 0 Ke 0
VC P
FC

I< 0 unit variable cost I< 0 unit variable cost

-J -J
-<;-J -< -<;-J -<
K K
Ke 0 Ke 0
VC P
FC

.(ample >1 .(ample >1 A manufacturing <o. "as a -otal @i(ed <ost of #r. 10*000 + a Lnit Iariable A manufacturing <o. "as a -otal @i(ed <ost of #r. 10*000 + a Lnit Iariable
<ost of #r. G. if t"e co. can sell .A"at it produces at a price of #r. 10* <ost of #r. G. if t"e co. can sell .A"at it produces at a price of #r. 10*
a4 a4 Arite t"e Jevenue* cost + Drofit functions Arite t"e Jevenue* cost + Drofit functions
b4 b4 @ind t"e brea$even point in terms of quantit% and sales volume @ind t"e brea$even point in terms of quantit% and sales volume
c4 c4 S"o, diagrammaticall% t"e -otal Jevenue* -otal <ost* -otal Drofit* @i(ed <ost S"o, diagrammaticall% t"e -otal Jevenue* -otal <ost* -otal Drofit* @i(ed <ost
and Iariable <osts. and Iariable <osts.
d4 d4 Interpret t"e results Interpret t"e results
Ans,er Ans,er
a4 -< 0 I< 2 @< -J 0 DK Drofit3 a4 -< 0 I< 2 @< -J 0 DK Drofit3 4 0 -J 5 -< 4 0 -J 5 -<
-< 0 GK 2 10*000 -J 0 10K 0 10K 5 3GK 2 10*0004 -< 0 GK 2 10*000 -J 0 10K 0 10K 5 3GK 2 10*0004
0 GK 5 10*000 0 GK 5 10*000
b4 At brea$ even point -J 0 -< b4 At brea$ even point -J 0 -<
10K 0 GK 2 10*000 10K 0 GK 2 10*000
GK 5 10*000 0 0 GK 5 10*000 0 0
Ke 0 Ke 0
G
000 * 10
Ke 0 2000 units Ke 0 2000 units
i.e. #rea$even Kuantit% is 2000 units i.e. #rea$even Kuantit% is 2000 units
Sales volume 0 2000 1 10 0 Sales volume 0 2000 1 10 0 20*000 br. 20*000 br.
N
2G000 2G000 -J 0 10K -J 0 10K
20000 20000 -< 0 GK 2 10000 -I< 0 GK -< 0 GK 2 10000 -I< 0 GK
1G000 1G000 -I< - -I< - 0 GK ! 10000 0 GK ! 10000
10000 10000
G000 G000 -@< -@<
0 0
1000 2000 000 &000 G000 1000 2000 000 &000 G000 K K 3no. of units produced 3no. of units produced
+ sold4 + sold4
!G000 ! !G000 !
!10000 ! !10000 !
Interpretation) Interpretation)
A"en a co. produces + sells 2000 units of output* t"ere ,ill not be an% loss or gain 3no A"en a co. produces + sells 2000 units of output* t"ere ,ill not be an% loss or gain 3no
profit* no loss4 profit* no loss4
T$e e))e(t o) ($n0in0 one .!i1%e -ee&in0 ot$e! (onstnt T$e e))e(t o) ($n0in0 one .!i1%e -ee&in0 ot$e! (onstnt
Cse 1 ' 2i3e4 (ost Cse 1 ' 2i3e4 (ost
Assume for t"e above problem @< is decreased b% #r. G000* <itrus Daribus 3ot"er t"ings Assume for t"e above problem @< is decreased b% #r. G000* <itrus Daribus 3ot"er t"ings
being constant4 being constant4
-< 0 GK 2 G000 -< 0 GK 2 G000 Ke 0 Ke 0
G
G000
0 1000 units 0 1000 units
-J 0 10K -J 0 10K
-"erefore* @< -"erefore* @< Ke Ke @< + Ke "ave direct relations"ip @< + Ke "ave direct relations"ip
@< @< Ke Ke
Cse 2'Unit .!i1%e (ost Cse 2'Unit .!i1%e (ost
Assume for t"e above problem LI< decreased b% 1 br. <itrus Daribus 3$eeping ot"er Assume for t"e above problem LI< decreased b% 1 br. <itrus Daribus 3$eeping ot"er
t"ing constant4 t"ing constant4
-< 0 &K 2 10000 -< 0 &K 2 10000 Ke 0 Ke 0
units FF6 * 1
F
10000
=
-J 0 10K -J 0 10K
10
-"erefore* I< -"erefore* I< Ke Ke I< + Ke "ave direct relations"ip I< + Ke "ave direct relations"ip
I< I< Ke Ke
Cse +' Se%%in0 &!i(e Cse +' Se%%in0 &!i(e
Assume for t"e above problem selling price is decreased b% br. 1* <itrus Daribus* Assume for t"e above problem selling price is decreased b% br. 1* <itrus Daribus*
-< 0 GK 2 10*000 -< 0 GK 2 10*000 Ke 0 Ke 0
units 2G00
&
10000
=
-J 0 NK -J 0 NK
-"erefore D -"erefore D Ke Ke Drice and brea$even point "ave indirect relations"ip Drice and brea$even point "ave indirect relations"ip
D D Ke Ke
In t"e above e(ample a compan% "as t"e follo,ing options 3to minimi=e its brea$even In t"e above e(ample a compan% "as t"e follo,ing options 3to minimi=e its brea$even
point and ma(imi=e profit4. point and ma(imi=e profit4.
! ! decreasing @< decreasing @<
! ! decreasing unit I< decreasing unit I<
! ! increasing t"e unit selling price increasing t"e unit selling price
And if t"e organi=ation is bet,een option 2 + * it is preferable to decrease t"e unit And if t"e organi=ation is bet,een option 2 + * it is preferable to decrease t"e unit
variable cost because if ,e increase t"e selling price* t"e organi=ation 'a% loose its variable cost because if ,e increase t"e selling price* t"e organi=ation 'a% loose its
customers + also decreasing t"e @< is preferable. customers + also decreasing t"e @< is preferable.
-J -J
-< -<
-@< -@<
Ke K Ke K
11
2in4in0 t$e "#ntit/ %e.e% ,$i($ in.o%.es &!o)it o! %oss 2in4in0 t$e "#ntit/ %e.e% ,$i($ in.o%.es &!o)it o! %oss
#.D 0 #.D 0
V P
FC

+0
* an% K is related to t"e cost * profit!!!! * an% K is related to t"e cost * profit!!!!

0 -J 5 -c A"ere) #.D 0 brea$even point 0 -J 5 -c A"ere) #.D 0 brea$even point
0 DK 5 3I<.K 2 @<4 0 DK 5 3I<.K 2 @<4 0 Drofit 0 Drofit
0 3D.K 5 I<.K4 5 @< -J 0 -otal revenue 0 3D.K 5 I<.K4 5 @< -J 0 -otal revenue
0 K 3D 5 I<4 5 @< -< 0 -otal cost 0 K 3D 5 I<4 5 @< -< 0 -otal cost

VC P
FC
Q level qty any for
VC P
FC

= =

+
K 0 Kuantit% K 0 Kuantit%
< 0 Lnit variable cost < 0 Lnit variable cost
.(ample >1 .(ample >1 @or t"e above manufacturing co. if it ,ants to ma$e a profit of 2G000 br. @or t"e above manufacturing co. if it ,ants to ma$e a profit of 2G000 br.
A"at s"ould be t"e quantit% levelH A"at s"ould be t"e quantit% levelH
-J 0 10K K 0 -J 0 10K K 0
V P
FC

,"en t"ere is ,"en t"ere is * t"e quantit% produced + * t"e quantit% produced +
sold "ave to be greater t"an t"e sold "ave to be greater t"an t"e
#rea$even quantit% #rea$even quantit%
-< 0 GK 2 10*000 0 -< 0 GK 2 10*000 0
G 10
2G000 000 * 10

+

0 2G*000 0 0 2G*000 0 6000 units 6000 units
K 0 H K 0 H

If it e(pects a loss of br. G000 ,"at ,ill be t"e quantit% level. If it e(pects a loss of br. G000 ,"at ,ill be t"e quantit% level.
K 0 K 0
G 10
G000 000 * 10

VC P
VC FC
9 ,"en t"ere is loss* t"e qt% produced + sold 9 ,"en t"ere is loss* t"e qt% produced + sold
s"ould be less t"an t"e #.K s"ould be less t"an t"e #.K
Cse 2 Me!($n4isin0 5Reti% B#siness Cse 2 Me!($n4isin0 5Reti% B#siness
#rea$even Jevenue 0 #.K 1 D #rea$even Jevenue 0 #.K 1 D
Assume a bus. @irm ,it" product A "as t"e Assume a bus. @irm ,it" product A "as t"e follo,ing cost + cost + revenue items. items.
Iariable cost of A 0 100 br. Iariable cost of A 0 100 br.
Selling price 0 1G0 br. Selling price 0 1G0 br.
12
'ar$up 0 Selling price 5 Iariable cost 0 1G0 5 100 0 G0 'ar$up 0 Selling price 5 Iariable cost 0 1G0 5 100 0 G0
i. as a function of cost* t"e mar$up is G0;100 0 G0C i. as a function of cost* t"e mar$up is G0;100 0 G0C
ii. as a function of retail price* t"e mar$up is G0;1G0 0 . C it is also called margin. ii. as a function of retail price* t"e mar$up is G0;1G0 0 . C it is also called margin.
'argin <ost of goods sold 'argin <ost of goods sold
-"e cost of goods sold 0 100C ! . C 0 FF.FC -"e cost of goods sold 0 100C ! . C 0 FF.FC F6C F6C
Selling price <?S Selling price <?S
?iven ot"er selling e(pense 0 1Cof t"e selling price i.e. 0.011 ?iven ot"er selling e(pense 0 1Cof t"e selling price i.e. 0.011
So* t"e -< equation becomes) So* t"e -< equation becomes)
/ 0 0.FE1 2 @< / 0 0.FE1 2 @<
A"ere) 1 is sales revenue A"ere) 1 is sales revenue
/ is total cost / is total cost
Out of 100C selling price FEC is t"e variable cost of goods purc"ased + sold Out of 100C selling price FEC is t"e variable cost of goods purc"ased + sold
.(ample .(ample Suppose a retail business sale its commodities at a margin of 2GC on all items Suppose a retail business sale its commodities at a margin of 2GC on all items
purc"ased + sold. 'oreover t"e compan% uses GC commission as selling e(pense + br. purc"ased + sold. 'oreover t"e compan% uses GC commission as selling e(pense + br.
12000 as a @i(ed <ost. 12000 as a @i(ed <ost.
@ind t"e #rea$even revenue for t"e retail business after developing t"e equation @ind t"e #rea$even revenue for t"e retail business after developing t"e equation
Solution Solution Selling price 100C Let 1 represents selling price Selling price 100C Let 1 represents selling price
'argin 'argin 2GC 2GC / 0 total cost / 0 total cost
<?S 6GC @< 0 12000 <?S 6GC @< 0 12000
<omm. .(p. <omm. .(p. GC GC 1e 0 #rea$even revenue 1e 0 #rea$even revenue
-otal I< E0C -otal I< E0C
/ 0 0.E1 2 12000 / 0 0.E1 2 12000
#rea$ even revenue is obtained b% ma$ing sales revenue + cost equals #rea$ even revenue is obtained b% ma$ing sales revenue + cost equals
At brea$even point -< 0 -J / 0 m( 2 b At brea$even point -< 0 -J / 0 m( 2 b
i.e. / 0 1 t"en* unit variable cost i.e. / 0 1 t"en* unit variable cost
0.E1 2 12000 0 1 0.E1 2 12000 0 1
TR
TVC
P
VC
m where
m
FC
or
m
FC
= =

1 1
!0.21 0 !12000 !0.21 0 !12000
1
1 0 F0*000 br. 1 0 F0*000 br. A"en t"e co. receives br. F0*000 as sales revenue* A"en t"e co. receives br. F0*000 as sales revenue*
t"ere ,ill be no loss or profit. t"ere ,ill be no loss or profit.
-"e #rea$even revenue 3#.J 0 -"e #rea$even revenue 3#.J 0
m
FC

1
4 met"od is useful* because ,e can use a 4 met"od is useful* because ,e can use a
single formula for different goods so far as t"e compan% uses t"e same amount of profit single formula for different goods so far as t"e compan% uses t"e same amount of profit
margin for all goods. 7o,ever* in #rea$even quantit% met"od or #.K 0 margin for all goods. 7o,ever* in #rea$even quantit% met"od or #.K 0
V P
FC

it is it is
not possible and "ence ,e "ave to use different formula for different items. not possible and "ence ,e "ave to use different formula for different items.
.(ample >1 .(ample >1 It is estimated t"at sales in t"e coming period ,ill be br. F000 + t"at @< It is estimated t"at sales in t"e coming period ,ill be br. F000 + t"at @<
,ill be br. 1000 + variable costs br. F00* develop t"e total cost equation + t"e ,ill be br. 1000 + variable costs br. F00* develop t"e total cost equation + t"e
brea$even revenue. brea$even revenue.
Ans,er) Ans,er) / 0 / 0
F000
F00
1 2 1000 0 0.F1 2 1000 1 2 1000 0 0.F1 2 1000
A"ere / 0 -otal <ost A"ere / 0 -otal <ost
1 0 -otal revenue 1 0 -otal revenue
#.J 0 1e 0 #.J 0 1e 0
. 2G00
& . 0
1000
F . 0 1
1000
br = =

At t"e sales volume of br. 2G00* t"e compan% brea$s even. At t"e sales volume of br. 2G00* t"e compan% brea$s even.

9 A"en t"e brea$even revenue equation is for more t"an one item it is impossible to find 9 A"en t"e brea$even revenue equation is for more t"an one item it is impossible to find
t"e brea$even quantit%. It is onl% possible for one item b% Ke 0 1e;D t"e brea$even quantit%. It is onl% possible for one item b% Ke 0 1e;D
A"ere 1e 0 #rea$ even revenue A"ere 1e 0 #rea$ even revenue
D 0 selling price D 0 selling price
Ke 0 #rea$even quantit% Ke 0 #rea$even quantit%
-o c"ange t"e brea$even revenue equation in to #rea$even quantit% . Ae "ave to -o c"ange t"e brea$even revenue equation in to #rea$even quantit% . Ae "ave to
multiple price b% t"e coefficient of 1. li$e,ise* to c"ange in to brea$even revenue from multiple price b% t"e coefficient of 1. li$e,ise* to c"ange in to brea$even revenue from
#rea$ even quantit%* ,e "ave to divide t"e unit I< b% price. #rea$ even quantit%* ,e "ave to divide t"e unit I< b% price.
1.6 Mo4e% e3*intion "#estions 1.6 Mo4e% e3*intion "#estions
1. 1. 1/O compan%8s cost function for t"e ne(t four mont"s is 1/O compan%8s cost function for t"e ne(t four mont"s is
< 0 G00*000 2 GK < 0 G00*000 2 GK
1&
a4 a4 @ind t"e #. dollar volume of sales if t"e selling price is br. F ; unit @ind t"e #. dollar volume of sales if t"e selling price is br. F ; unit
b4 b4 A"at ,ould be t"e compan%8s cost if it decides to s"utdo,n operations for A"at ,ould be t"e compan%8s cost if it decides to s"utdo,n operations for
t"e ne(t four mont"s t"e ne(t four mont"s
c4 c4 If* because of stri$e* t"e most t"e compan% can produce is br. 100*000 If* because of stri$e* t"e most t"e compan% can produce is br. 100*000
units* s"ould it s"utdo,nH A"% or ,"% notH units* s"ould it s"utdo,nH A"% or ,"% notH
2. 2. In its first %ear* PAbol #una <oQ "ad t"e follo,ing e(perience In its first %ear* PAbol #una <oQ "ad t"e follo,ing e(perience
Sales 0 2G*000 units Selling price 0 br. 100 Sales 0 2G*000 units Selling price 0 br. 100
-I< 0 br. 1*G00*000 -@< 0 br. G0*000 -I< 0 br. 1*G00*000 -@< 0 br. G0*000
Re"#i!e4: Re"#i!e4:
1. 1. Develop Jevenue* cost + profit functions for t"e co. in terms of quantit%. Develop Jevenue* cost + profit functions for t"e co. in terms of quantit%.
2. 2. @ind t"e #rea$even point in terms of quantit% @ind t"e #rea$even point in terms of quantit%
. . <onvert t"e cost equation in terms of quantit% in to a cost equation in terms of <onvert t"e cost equation in terms of quantit% in to a cost equation in terms of
revenue revenue
&. &. @ind t"e #rea$even revenue @ind t"e #rea$even revenue
G. G. If profit "ad been br. G00*000 ,"at ,ould "ave been t"e sales volume 3revenue4 If profit "ad been br. G00*000 ,"at ,ould "ave been t"e sales volume 3revenue4
+ t"e quantit% of sales + t"e quantit% of sales
F. F. A"at ,ould "ave been t"e profit if sales are br. 2*000*000. A"at ,ould "ave been t"e profit if sales are br. 2*000*000.
. . A small "ome business set up ,it" an investment of R 10*000 for equipment. -"e A small "ome business set up ,it" an investment of R 10*000 for equipment. -"e
business manufactures a product at a cost of br. 0.F& per unit. If t"e product sales business manufactures a product at a cost of br. 0.F& per unit. If t"e product sales
for #r. 1.20 per unit "o, man% units must be sold before t"e business brea$s for #r. 1.20 per unit "o, man% units must be sold before t"e business brea$s
evenH evenH
&. &. A retail co. plans to ,or$ on a margin of &&C of retail price + to incur ot"er A retail co. plans to ,or$ on a margin of &&C of retail price + to incur ot"er
Iariable <ost of &C. If is e(pected @i(ed cost of #r. 20*000. Iariable <ost of &C. If is e(pected @i(ed cost of #r. 20*000.
i. i. @ind t"e equation relating -otal <ost to sales @ind t"e equation relating -otal <ost to sales
ii. ii. @ind t"e profit if sales are #r. F0*000 @ind t"e profit if sales are #r. F0*000
iii. iii. @ind t"e brea$even revenue @ind t"e brea$even revenue
iv. iv. If profit is #r. 1G*000 ,"at s"ould be t"e revenue levelH If profit is #r. 1G*000 ,"at s"ould be t"e revenue levelH
1G
v. v. If %ou "ave an% one item at a price of #r. 1G;unit "o, do %ou convert If %ou "ave an% one item at a price of #r. 1G;unit "o, do %ou convert
t"e cost equation in terms of revenue in to a cost equation in terms of t"e cost equation in terms of revenue in to a cost equation in terms of
quantit%H quantit%H
1F