Business 2023

Mathematics

CHAPTER 1:
Linear Equations and their interpretive
application
INTRODUCTION
Mathematics Vs Business Mathematics

Mathematics: is an area of knowledge, which includes the study of such

topics as numbers (arithmetic and number theory), formulas and related
structures (algebra), shapes and spaces in which they are contained
(geometry), and quantities and their changes (calculus and analysis).

Business Mathematics: consists of Mathematical concepts related to

business.
Importance of Business
Mathematics
To analyze and solve
different problems we encounter in
business.

To forecast, estimate and evaluate

the financial performance of the
business.

It helps us in taking and improving

decision-making about different
aspects of the business.
Algebraic Expression - a mathematical statement indicating that
numerical quantities are linked by mathematical operations.
E.g. x+2, 2x + y
Many of the relationships in economics, business, and finance are quantitative in
nature. This nature helps these subjects apply various mathematical tools in their
analysis of relationships.

One such tool is the concept of equations. Business managers often engage with
the profit equation, revenue equation, cost equation, etc.

Students of finance also make use of equations such as the discount and
compound formulas, break-even equations, etc.
Therefore, students of these subjects require a good understanding of the
meaning of equations, their types, their geometric forms, their determinations
and solutions, etc.
Let there be two expressions: y - 5 and 2x.
An equation is defined as a statement that two expressions are equal, and the two
statements are separated by an equals the sign ‘=’.

Equation -an equation is a mathematical statement consisting of an equal symbol

between two algebraic expressions that have the same value.

Therefore, if we write y -5 = 2x it is an equation. The left-hand side of this

equation (y -5) is called the LHS and the right-hand side (2x) is called the RHS.
A mathematical statement that says two algebraic expressions are equal. In an algebraic
equation, the left-hand side is equal to the right-hand side.
E.g. y = 2x + 3
2x + 17y – 3 ?
Linear Functions
A function is simply a mapping or relationship between an input or set of
inputs, and an output.

We usually write that y, the output, is a function f of x, the input:

y = f (x).
y could be a linear function of x, where the relationship can be expressed
as a straight line on a graph eg. P=f(Q)
or y could be a non-linear function of x, in which case the relationship
between the two variables would be represented graphically as a curve.
Eg Pr=f(Li)
If the relationship is linear, we could write the equation for this straight line
as y=ax+b
 y=ax+b
y and x are called variables
a and b are Constant or Coefficient ;
a is the slope or gradient of the line.
b is termed as the intercept.

X is the independent variable, and y is the dependent variable, the

degree of X one
The intercept is the point at which the line crosses the y-axis, while the
slope measures the steepness of the line.
e.g 2x - 3y = 7
2x + 3xy = 7 ?
A solution of an equation in two variables is an ordered pair of real numbers that
satisfies the equation. For example, (4, 3) is a solution of 3x - 2y = 6.

The solution set of an equation in two variables is the set of all solutions of the equation.
The graph of an equation is the graph of its solution set.

The points where the line crosses the axes are often the easiest to find. The y intercept is the y
coordinate of the point where the graph crosses the y axis, and the x intercept is the x coordinate
of the point where the graph crosses the x axis.

To find the y intercept, let x = 0 and solve for y. To find the x intercept, let y = 0 and solve for x. It is
a good idea to find a third point as a check point.
Application of Linear Equations

Depreciation
Over time, fixed assets, with the exception of land, lose their ability to provide
services.

This periodic recording of the cost of fixed assets as an expense is called

depreciation.

Net Book Value=Initial Cost- Initial Cost(Dep Rate)

Dep=Initial Cost(Dep Rate)

Capital Asset Pricing Model (CAPM)

The Capital Asset Pricing Model (CAPM) describes the relationship between
systematic risk and expected return for assets

The CAPM was introduced by Jack Treynor (1961, 1962), William F. Sharpe
(1964), John Lintner (1965a,b) and Jan Mossin (1966) independently, building on
the earlier work of Harry Markowitz on diversification and modern portfolio theory.

Sharpe, Markowitz and Merton Miller jointly received the 1990 Nobel Memorial
Prize in Economics for this contribution to the field of financial economics.
The beta of a potential investment is a measure of how much risk the
investment will add to a portfolio that looks like the market.

If a stock is riskier than the market, it will have a beta greater than one.

If a stock has a beta of less than one, the formula assumes it will reduce
the risk of a portfolio.
Slope
The slope or gradient of a line is a number that describes both
the direction and the steepness of the line. Slope is often denoted by the
letter m.
Slope is calculated by finding the ratio of the "vertical change" to the
"horizontal change" between (any) two distinct points on a line.
Sometimes the ratio is expressed as a quotient ("rise over run"), giving the
same number for every two distinct points on the same line.
If we take two points, P1(X1, Y1) and P2(X2, Y2), on a line, then the ratio of the change
in y to the change in x as the point moves from point P1 to point P2 is called the slope
of the line. In a sense, slope provides a measure of the “steepness” of a line relative
to the x axis. The change in x is often called the run, and the change in y is the rise.
The direction of a line is either increasing, decreasing, horizontal or
vertical.
1)A line is increasing if it goes up from left to right. The slope
is positive, i.e. m>0
2)A line is decreasing if it goes down from left to right. The slope
is negative, i.e. m<0
3)If a line is horizontal the slope is zero. This is a constant function.
4)If a line is vertical the slope is undefined
For a horizontal line, y does not change; its slope is 0. For a vertical line, x does not
change; x1 = x2 so its slope is not defined.
The general notation of a linear equation is Y = mx + b,
Where, m = slope
b = y-intercept.

A line’s slope number tells us how much the line falls (or rises) for a stated change in x.

The slope of a line is defined as the change taking place along the vertical axis relative
to the corresponding change taking place along the horizontal axis, or, THE CHANGE IN
THE VALUE OF Y RELATIVE TO A ONE - UNIT CHANGE IN THE VALUE OF X.

Linear equations are equations whose slope is constant throughout the line.
E.g Y=3x-7
Intercepts - Those points at which the graph of a line, L, crosses the axes are
called intercepts.

The X-intercept is the point at which the line crosses the X-axis and it is found at
(X, 0)

and the Y-intercept is the point at which the y-axis is crossed. Its coordinate is at
(0, y).

E.g Y=3x-7

X-intercept (7/3,0) and Y-intercept (0,-7)

DEVELOPING THE EQUATION OF A STRAIGHT LINE
There are at least three ways of developing the equation of a line, these are:
1) The slope - intercept form
2) The slope - point form
3) Two-points form.

1) The slope - intercept form

Slope-intercept is a specific form of linear equations. It has the following general
structure.
y=mx+b, m = slope, b = y intercept

E.g Slope=10
Y-intercept=20

A line that has a slope of 10 and a y-intercept of 20 has the following equation:
Y=10x +20
E.g
Suppose the fixed cost (set up cost) for producing product x be Birr 2,000. After
setup it costs Birr 10 per x produced. If the total cost is represented by y:
1. Write the equation of this relationship in slope intercept form.
2. State the slope of the line and interpret this number.
3. State the y-intercept of the line and interpret this number.

E.g .
A Salesman has a fixed base salary of Br 200 a week. In addition, he receives a sales
commission that is 20 percent of his total Birr values of sales. State the relationship
between the salesman’s total weekly salary and his sales for the week.
2) The slope - point form

The equation is useful when we know:

one point on the line: (x1,y1)
and the slope of the line: m,
and want to find other points on the line.

E.g Find an equation for the line that has slope 1/2 and passes through (-4, 3).
E.g

2)A salesman earns a weekly base salary plus a sales commission of 20% of his total weekly sales.
When his total weekly sales total Birr 1000, his total salary for the week is Birr 400.
Derive the formula describing the relationship between total salary and sales.

3) If the relationship between total cost and the number of units made is linear, and if cost
increases by Birr 7 for each additional unit made, and if the total cost of 10 units is Br 180, find
the equation of the relationship between total cost (Y) and number of units made (x)
3) Two-points form.
Two points are given(X1,Y1) and (X2,Y2)
There are 2 steps to find the Equation of the Straight Line :
1. Find the slope of the line(m)
2. Put the slope and one point into the "Point-Slope Formula"
E.g
1)A sales man has a base salary and, in addition, receives a commission, which is a fixed percentage
of his sales volume. When his weekly sales are Birr 1000, his total salary is Birr 400. When his
weekly sales are Birr 500, his total salary is Birr 300. Determine his base salary and his commission
percentage and express the relationship between sales and salary in equation form

2)A printer quotes the price of Birr 1,400 for printing 100 copies of a report and Birr 3000 for
printing 500 copies. Assuming a linear relationship what would be the price for printing
300 copies?

3)The management of a company that manufactures skateboards has fixed costs (costs at 0 output) of $300 per
day and total costs of $4,300 per day at an output of 100 skateboards per day. Assume that cost C is linearly
related to output x.
(A) Find the slope of the line joining the points associated with outputs of 0 and 100.
(B) Find an equation of the line relating output to cost.
Horizontal and vertical Lines
Horizontal lines are lines whose slope is zero.

These lines are parallel to the X-axis.

Vertical lines are lines whose slope is undefined.

These lines are parallel to the Y-axis.

Given the points (3, 6) & (8, 6) - the line through them is horizontal because both y-coordinates are
the same (6). The equation of the line becomes y=6.

Given the points (5, 2) and (5, 12), the line that passes through them is vertical, and its equation is
x = 5.
 Parallel and Perpendicular Lines

Two distinct lines that do not intersect are parallel. Non-vertical parallel lines have the same
slope.
Any two vertical lines, however, are also parallel. It is important to note that vertical lines have
undefined slope. E.g Y= 2x-10 and Y=2x+14 are parallel.
Perpendicular lines form an angle of 90∘
two lines are perpendicular to each other if the product of their slopes is - 1 or
the slope of one is the negative reciprocal of the slope of the other.

However, for vertical and horizontal lines, (they are perpendicular to each other),
this rule of m1 . m2 = -1 doesn’t hold true.
Lines through the Origin
Any equation in the variables x and y that has no constant term other than zero will have
a graph that passes through the origin. Or, a line that passes through the origin has an x-
intercept and a y-intercept of (0,0). These lines are expressed in the form Y = mx.
 LINEAR cost-out put relationships

Total Variable costs are costs that vary in proportion to changes in the activity base.
• vary with output
• Variable costs are the costs that change in total each time an additional unit is produced or sold.
• Total variable costs (TVC) are costs that vary directly with the number of units of items produced.
• TVC are necessary to produce the number of items for the specific period.

Variable Costs per Unit (VC)

The variable costs per unit (VC) is the ratio of the total variable costs to the total number of units
produced. These are costs from producing one unit of the item:

TVC= (VC)Q
Variable costs have the following characteristics:
1) Total cost changes in proportion to changes in the activity base.
2) Cost per unit remains the same regardless of changes in the
activity base.
• E.g. Direct labor, Direct raw materials, Commissions, Utilities,Taxes ,Operational expenses,
etc

• If no quantity is produced, then the total variable costs are zero. As the business produces
more units, these costs increase proportionally.
Fixed Costs
Fixed costs (FC) are costs that remain the same regardless of the number of items produced to sell.
Fixed costs are costs that remain the same in total dollar amount as the activity base changes.
Fixed costs are calculated for a specific time period (per annum, per month, etc.) and are based on
the production of a predetermined quantity of products - known as the maximum quantity or
capacity of the facility - for that period.

For example, if a furniture company rents a building at $5000 per month, that cost will remain the
same regardless of how many pieces of furniture they produce.

fixed costs have the following characteristics:

1. Total fixed cost remains the same regardless of changes in the
activity base.
2. Cost per unit decreases as the activity level increases,
and increases as the activity level decreases.
E.G Rent, Employee Salaries, Loan Payments, cost of land and equipment, insurance costs,
property taxes, equipment rental or depreciation, and marketing and advertising costs.
These are considered fixed costs, since any variation is infrequent, and the amount does not
directly depend on the number of units produced.

In the short run, these costs are fixed. Obviously, in the long run all costs are variable, but these
particular costs take time to vary, so can be thought of as fixed in the short run.
Total costs
The total cost (TC) curve is found by adding total fixed and total variable costs. Its
position reflects the amount of fixed costs, and its gradient reflects variable costs.
The total revenue (TR) is the amount of money received or brought into the business from the sales
of the items produced and sold during a period. Total revenue is calculated by multiplying the selling
price per unit (P) at which items are sold by the number of units sold (Q), as shown in the following
formula:
TR=Q×P

Profit or Net Income (NI)

Net income (NI) defines the success of the business by determining the difference between the total
revenue (TR) earned and the total costs (TC) incurred in the business.

If the total revenue exceeds the total costs, then there is a net profit. If the total revenue is less than
the total costs, then there is a net loss. If the total revenue is equal to the total costs, then the
business breaks even.
 T

B F G

A C D
Interpretation of the graph:
1. The vertical distance between AB, FC, GD is the same because Fixed Cost is the same at any
levels of output. TFC remains constant regardless of the number of units produced. Given that
there is no any difference in scale of production.
2. There is no revenue without sales (because Total Revenue function passes through the origin),
but there is cost without production (because of Fixed Cost) & the TC function starts from A &
doesn’t pass through the origin
3. Up to point T, Total Cost is greater than Total Revenue  results in loss. While at point T,
(Total Revenue = Total Cost) i.e. Breakeven. (0 profit), & above point T, TR > TC  +ve
profit.
Marginal costs(MC)
Marginal cost is the cost of producing one extra unit of output. It can be found by calculating
the change in total cost when output is increased by one unit.

Average fixed costs(AFC)

Average fixed costs are found by dividing total fixed costs by output. As fixed cost is
divided by an increasing output, average fixed costs will continue to fall.
The AFC curve will slope down continuously, from left to right.
Average variable costs(AVC)
Average variable costs are found by dividing total variable costs by output.
The AVC curve will at first slope down from left to right, then reach a minimum point, and rise
again.
AVC is ‘U’ shaped because of the principle of variable Proportions, which explains the three
phases of the curve:
• Increasing returns to the variable factors, which cause average costs to fall, followed by:
• Constant returns, followed by
• Diminishing returns, which cause costs to rise.
Average total cost(ATC)
Average total cost (ATC) is also called average cost or unit cost
Average total cost (ATC) can be found by adding average fixed costs (AFC) and average
variable costs (AVC). The ATC curve is also ‘U’ shaped because it takes its shape from
the AVC curve, with the upturn reflecting the onset of diminishing returns to the variable
factor.

The law of diminishing marginal

returns which states that employing
an additional factor of production
will eventually cause a relatively
smaller increase in output.
•Revenue is the total amount of money a company brings in from selling its goods and
services at a specific price.
•Total revenue (TR)is the full amount of total sales of goods and services.
•It is calculated by multiplying the total amount of goods and services sold by their prices.
TR=Q×P where: TR=total revenue Q=quantity P=price​

•Average revenue(AR) is the revenue per unit of the commodity sold. It is obtained by dividing
the total revenue by the number of units sold. Mathematically AR = TR/Q

•Marginal revenue (MR) - the increase in total revenue as the result of one additional sale.
Interpretation Continued
4. As production increases, Total Variable Cost increases at the same rate and Marginal cost is
equal with Unit Variable Cost (MC = VC) only in linear equations.

Fixed costs do not affect the marginal cost of production since they do not typically vary with additional units.
Variable costs, however, tend to increase with expanded capacity, adding to marginal cost due to the law of
diminishing marginal returns.

5.As production increases TC increases by the rate equal to the AVC = MC (average cost equal to
marginal cost)

6. AVC is the same through out any level of production, however Average Fixed Cost (AFC)
decreases when Quantity increases & ultimately ATC decreases when Q increases because of the
effect of the decrease in AFC.
7. As Quantity increases TR increases at a rate of P. and average revenue remains constant.
Breakeven Analysis
In most businesses, the goal is to make a profit.

To achieve this goal, the total revenue from the business should exceed the total costs associated
with it. Revenue is earned from the sales of the product manufactured or produced, but there are
numerous costs incurred in manufacturing or producing a product before selling it.

Therefore, it is important to determine the number of units of the product that need to be produced
and sold in order to cover all of the costs related to producing it.

When the number of units of the product produced and sold cover all the costs related to producing
it, the business is said to break even.

The point at which the total revenue or total sales is equal to the total costs is known as the break-
even point. At the break-even point, the profit (net income) or loss is zero; i.e. there is no profit made
or loss incurred.
The break-even point is generally expressed in terms of volume (or quantity produced and sold). It
may also be expressed in terms of total revenue. Any quantity that is produced and sold over this
break-even point will result in a profit, while any quantity that is produced and sold below this break-
even point will result in a loss.

Therefore, a good understanding of how revenue and costs change with the quantity produced and
sold is important. It is also necessary to understand the relationships among fixed costs, variable
costs, selling price, etc.

To be competitive in the market, businesses should look into ways of lowering their costs by reducing
fixed costs and unit variable costs, while optimizing the quantity of items produced and sold, as well
as by analyzing the resulting effects on their revenue.
In this topic, you will learn to answer some of the important questions in making such
business decisions using the following techniques:
(i) break-even analysis,
(ii) cost-volume-profit (CVP) analysis,
(iii) contribution margin (CM) per unit approach,
(iv) contribution margin (CM) percent approach, and
(v) graphical approach (break-even charts).
(i)Breakeven Analysis
Break-even analysis is one of the techniques used to determine the level of sales required to cover
the fixed costs and the variable costs of producing the item and to set targets in terms of units or
revenue to achieve the expected level of profitability.

The calculation of the break-even point requires the business to determine fixed costs, variable costs,
selling price, etc. Once these values are known, the break-even point is determined by calculating the
point at which revenue received from the sales equals the total costs associated with the production
of the goods or services.

The break-even point is the level of operations at which a company’s revenues and expenses are
equal. Break-even point is the point at which there is no loss or profit to the company.
At break-even, a company reports neither an income nor a loss from operations.

It can be expressed as either in terms of production quantity or revenue level depending on how the
company states its cost equation. Manufacturing companies usually state their cost equation in terms of
quantity (because they produce and sell) where as retail business state their cost equation in terms of
revenue (because they purchase and sell)
CASE 1: MANUFACTURING COMPANIES
Consider a Company with equation
Total cost = Total Variable cost + Total Fixed cost
TC= TVC+FC , TVC= (VC)Q

TC = (VC)Q + FC

Total Revenue = Price x Quantity

TR = PQ.
Where Q = units product & units sold in revenue
TC = Total Cost
FC = Fixed Cost
VC = Unit variable Cost
Example 1
A manufacturing Co. has a Total Fixed Cost of Br. 10,000 & a Unit Variable Cost of Br. 5. if the
company can sell ,what it produces at a price of Br. 10,

a) Write the Revenue, cost & Profit functions

b) Find the breakeven point in terms of quantity and sales volume
c) Show diagrammatically the Total Revenue, Total Cost, Total Profit, Fixed Cost and Variable Costs.
d) Interpret the results
Example 2 TreadOut must produce 3200 tires per month to break even. The fixed costs per month are
$12,850 for administrative salaries, $18,600 for rent and utilities, $2400 for insurance costs, and $4550
for equipment rental. The variable costs are $10 per tire for material and $30 per tire for labor.
a) What is the total revenue per month required to break even?
b) What is the selling price per tire at the break-even point?
Contribution Margin (CM) per Unit

Contribution margin (CM) per unit is the difference between the selling price per unit (P) and the
variable costs per unit (VC).

It is expressed on a per unit basis. It represents the amount that each unit sold brings in after
recovering its variable costs.

This amount will contribute towards covering the fixed costs. It is shown in the following formula:
CM=P-VC

The contribution amount from the sale of all units during

a period is first used to cover the fixed costs (FC). If the
contribution amount from the sale of all units exceeds
the fixed costs for a period, then there is a profit;
similarly, if the contribution amount from the sale of all P
units is less than the fixed costs, then there is a loss.
The break-even point is usually calculated in units. This is the number of units the business must
produce in order to break even. It can be calculated by dividing the fixed costs (FC) by the
contribution margin per unit (CM).

That is,

Every additional unit produced and sold above this point will result in increasing the net income
by the amount of unit contribution margin (CM).
 Assumptions of Breakeven Analysis
1. Selling price per unit (P) is constant and is not affected by a change in the number of units
sold; i.e. Total Revenue (TR=PQ ) is a linear function.

2. Costs are linear.(Fixed Costs (FC) remain the same throughout the specified period. Variable
Costs per unit (VC) is constant and is not affected by a change in the number of units sold;
i.e. Total Cost (TC =FC + VC Q) is a linear function where VC Q = TVC.
3. In multi-product companies, the sales mix is constant.(When multiple products are
produced in a company, the ratio of various products produced remains constant.)

4. In manufacturing firms, inventories do not change (Quantity of items (Q) produced is equal
to the quantity of items sold. Units produced = Units sold).

5. Expenses may be classified in to variable and fixed categories. Total variable expenses vary
directly with activity level. Total fixed expenses do not change with activity level.

6. Efficiency and productivity will be unchanged.

The break-even point is affected by changes in the fixed costs, unit variable
costs, and the unit selling price.
CASE 1 - FIXED COST
Effect of Changes in Fixed Costs :Fixed costs do not change in total with changes in the
level of activity. However, fixed costs may change because of other factors such as
advertising campaigns, changes in property tax rates, or changes in factory supervisors’
salaries.
Assume for the above problem FC is decreased by Br. 5000, Citrus Paribus (other things
being constant)

Changes in fixed costs affect the break-even point as follows:

1. Increases in fixed costs increase the break-even point.
2. Decreases in fixed costs decrease the break-even point.
CASE 2-UNIT VARIABLE COST
Effect of Changes in Unit Variable Costs :Unit variable costs do not change with
changes in the level of activity.
However, unit variable costs may be affected by other factors such as changes in the
cost per unit of direct materials, changes in the wage rate for direct labor, or changes in
the sales commission paid to salespeople.

Assume for the above problem unit variable cost decreased by Birr 1, citrus paribus

Changes in unit variable costs affect the break-even point as follows:

1. Increases in unit variable costs increase the break-even point.
2. Decreases in unit variable costs decrease the break-even point.
CASE 3- SELLING PRICE
Effect of Changes in Unit Selling Price: Changes in the unit selling price affect the unit contribution
margin(Unit Contribution Margin = Sales Price per Unit – Variable Cost per Unit ) and, thus, the
break-even point.
Assume for the above problem selling price is decreased by br. 1, Citrus Paribus
Specifically, changes in the unit selling price affect the break-even point as follows:

1. Increases in the unit selling price decrease the break-even point.

2. Decreases in the unit selling price increase the break-even point.
In the above example a company has the following options (to minimize its breakeven
point and maximize profit).

decreasing FC
decreasing unit VC
increasing the unit selling price

Apple vs Sony

For example, Apple has no manufacturing facilities of its own, and rival Sony has 57
electronics factories. Apple relies exclusively on contract manufacturers for
production of all of its products, whereas Sony owns its own plants. Less fixed assets
has enabled Apple to remain financially lean with virtually no long-term debt. Sony,
in contrast, has built up massive debt on its balance sheet.
ii)Cost-Volume-Profit (CVP)

The Cost-Volume-Profit (CVP) analysis examines the relationship among Fixed Costs (FC), Variable
Costs per Unit (VC), Selling Price per Unit (P), Total Costs (TC), Total Revenue (TR), Net Income (NI),
Sales Volume (Q), etc.

Cost-Volume-Profit (CVP) analysis can be used to determine the volume and revenue required to
break even, to achieve target profit, and to analyze the effects of change in Fixed Costs, Variable
Costs, Selling Price, etc.

Cost-Volume-Profit (CVP) analysis commences with the following profit equation:

Profit or Net Income (NI) = Total Revenue (TR) - Total Costs (TC)
NI=TR-TC , TR=PQ , TC=TVC+FC, TVC= (VC)Q
Target Profit :FINDING THE QUANTITY LEVEL WHICH INVOLVES PROFIT
At the break-even point, sales and costs are exactly equal. However, the goal of most companies is
to make a profit.
By modifying the break-even equation, the sales required to earn a target or desired amount of
profit may be computed. For this purpose, target profit is added to the break-even equation, as
shown below.
Example 1 A manufacturing Co. has a Total Fixed Cost of Br. 10,000 & a
Unit Variable Cost of Br. 5. if the company can sell ,what it produces at a
price of Br. 10,and wants to make a profit of 25000 br.
i. What should be the quantity level?
ii. If it expects a loss of br. 5000 what will be the quantity level?
Example2 Oliver has a printing company that prints textbooks, which are then sold to customers. His printing
facility can produce a maximum of 3000 textbooks per annum (capacity of the facility). The fixed costs per
annum are $100,000, the variable costs per unit are $75, and the selling price per unit is $125.
i. Calculate the number of books he should produce and sell per year to break even.
ii. In 2015, he produced and sold 1200 textbooks. Did he make a profit or incur a loss and by what
amount?
iii. In 2016, he produced and sold 2250 textbooks. Did he make a profit or incur a loss and by what
amount?
iv. In 2017, 80% of the facility was utilized to produce textbooks. Calculate the profit made or loss incurred
if all textbooks that were produced were sold.
v. In 2018, he wanted a profit of $40,000. How many books did he have to produce and sell and what
percent of the facility would he have utilized?
vi. What is the maximum profit per annum that he can expect from the facility?
CASE 2 MERCHANDISING /RETAIL BUSINESS
retail business state their cost equation in terms of revenue (because they purchase and sell)
Breakeven Revenue = BEQ X P

Markup = Selling price – Variable cost

i. as a function of cost,
ii. as a function of retail price
Example: Assume a bus. Firm with product A has the following cost & revenue items.
Variable cost of A = 100 br.
Selling price = 150 br.

Where X is sales Revenue and Y is the total cost,

Out of the 100% selling price 68% is the variable cost of good purchased and sold
 Example 1 Suppose a retail business sale its commodities at a margin of 25% on all items
purchased & sold. Moreover the company uses 5% commission as selling expense & br. 12000
as a Fixed Cost. Find the breakeven revenue for the retail business after developing the equation.

Example 2 It is estimated that sales in the coming period will be br. 6000 & that FC will be br.
1000 & variable costs br. 3600, develop the total cost equation & the breakeven revenue.
End