CHAPTERONE

LinearEquationsandTheirInterpretiveApplicationsinBusiness
ChapterObjectives
Afterstudyingthischapteryouwillbeableto:
Thischapterisaimedtoequipstudentswithsomebasicconceptsaboutlinearfunctionsandintroduceyou
withtheareasofapplications.Aftersuccessfullycompletingyourstudyofthischapter,youwillbeableto:
 Definelinearequations
 Developequationsofalinebyusingtwopointform,aslopepointformandaslopeinter
ceptform
 Identifythespecialcharacteristicsofvertical,horizontal,parallelandperpendicularl
ineswhenrepresentedmathematicallyusinglinearequations
 Understandtheapplicationoflinearequationslikecosts,revenue,profitetc.
 Determinebreakevenpoint(BEP).

LinearEquation-Amathematicalstatementthatsaystwoalgebraicexpressionsareequal.
E.g.y=2x+3
LinearEquations-areequationswithavariableandaconstantwithdegreeone.
-areequationswhoseterms(thepartseparatedby+,-,=signs)
-areaconstant,oraconstanttimesonevariabletothefirstpower.
-Linearequationsareequationswhoseslopeisconstantthroughouttheline.
E.g.2x-3y=7-degree1
-Constant7
-Terms2x&3yseparatedbytheminussign
However,2x+3xy=7isnotalinearequation;b/c3xyisaconstanttimestheproductoftwovariables.NoX 2,
y ,x/y,XYtermsareallowed.

Slope:Theslopeofalineisdefinedasthechange-
takingplacealongtheverticalaxisrelativetothecorrespondingchangetakingplacealongthehorizontala
xis,orthechangeinthevalueofYrelativetoaone-unitchangeinthevalueofX.
- ThegeneralnotionofalinearequationisexpressedinaformY=mx+bwherem=slope,b=theY-
intercept,Y=dependentvariableandX=independentvariable.

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 y Y y
  rise /
fall )

2 1
 if
x run X x
Slope(M)= 2 1 X1#X2
Thatis,Dependentvariable=(slopexindependentVariable)+Intercept.
Intercepts-Thosepointsatwhichthegraphofaline,L,crossestheaxesarecalledintercepts.TheX-
interceptisthepointatwhichthelinecrossestheX-axisanditisfoundat(X,0)andtheY-
interceptisthepointatwhichthey-axisiscrossed.Itscoordinateisat(0,y).

1.2HorizontalandVerticalLines
Horizontallinesarelineswhoseslopeiszero.TheselinesareparalleltotheX-
axis.Verticallinesarelineswhoseslopeisundefined.TheselinesareparalleltotheY-
axis.Whentheequationofalineistobedeterminedfromtwogivenpoints,itisagoodideatocomparecorres
pondingcoordinatesbecauseiftheyvaluesarethesamethelineishorizontal,andifthexvaluesarethesame
thelineisvertical.

Example
a) Giventhepoints(3,6)&(8,6)-thelinethroughthemishorizontalbecausebothy-
coordinatesarethesame(6).Theequationofthelinebecomesy=6.(y=b).
b) Giventhepoints(5,2)and(5,12),thelinethatpassesthroughthemisvertical,anditsequationisx=5.
(x=a).
12  2 10
 
Ifweproceedtoapplythepoint-slopeprocedure,wewouldobtain 5  5 0 ,andifm= 
thelineisverticalandtheformoftheequationis:x=constant.

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1.3 DevelopingtheEquationofaStraightLine
Thereareatleastthreewayofdevelopingtheequationofaline,theseare:
Theslope-interceptform
Theslope-pointform
Two-pointsform.

THESLOPE-INTERCEPTFORM

Thiswayofdevelopingtheequationofalineinvolvestheuseoftheslopeandtheintercepttoformulatethee
quation.Oftentheslopeandy-
interceptforaspecificlinearfunctionareobtaineddirectlyfromthedescriptionofthesituationwewishto
model.
E.g.1Slope=10
Y-intercept=20
Alinethathasaslopeof10anday-interceptof20hasthefollowingequation:Y=10x+20

Example.1Slope=4,point(1,2),theequationbecomesY=4X-2

TWO-POINTSFORM
Twopointscompletelydetermineastraightlineand,ofcourse,theydeterminetheslopeoftheline.

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Hencewecanfirstcomputetheslope,andthenusethisvalueofslope(m)togetherwitheitherpointinthepoi
nt-slopeform:Y-Y1=m(X-X1)togeneratetheequationofaline.

y 2
y 1

Alternatively,thefollowingformulacanalsobeused:(Y-Y )= x
x
1
x2 1 (X-X1)
E.g.1.Findanequationofthelinethatpassesthroughthepoints(1,10)and(6,0)
0  10 10
  2
First,findtheslope= 6  1 5 ,thenusetheSlope-pointform.
Y-Y1=M(X-X1)= Y-10=-2(X-1)
Y-10=-2X+2
Y=-2X+12

1.4ParallelandPerpendicularLines
 SlopesofParallelLines

Twolinesareparalleliftheyhavethesameslope,Ifm1andm2representtheslopesoftwoparallellines,the
nm1=m2
 SlopesofPerpendicularLines
Twolinesareperpendiculariftheproductoftheirslopesis–
1ortheslopeofoneisthenegativereciprocaloftheslopeoftheother.Ifm1≠0andm2≠0representtheslopes

oftwoperpendicularlines,thenm1=-1/m2orequivalentlym1*m2=-1

Example:
Y=2x-10andY=2x+14areparallelbecausetheirslopeareequal.i.e.2.
3 2
Y= 2 x+10andY= 3 x+100areperpendiculartoeachother.Becausethemultiplicationsresultofthetw
3 −2
x = −1
2 3
oslopesare–1i.e.

1.5 ApplicationsofLinearEquations

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fig.LinearCost-OutPutRelationShips:
TRline

TR BEP TCline
Profitarea
TC=VQ+FC

Lossarea

Q(sales volume)

Interpretationofthegraph
1. Inthiscase,werepresenttotalsalesvolumeontheX-
axisandthetotalrevenuegeneratedinbirrontheY-axis.
2. TotalcostlineisstartingfromthepointwherefixedcostlineismeetingtheY-
axis.Fixedcostlineisindependentofthevolumeofproduction.
3. Totalsalerevenuelinestartsfromtheoriginandgoestillthepointofmaximumproduction.Thenth
ebreakevenpoint(BEP)liesattheintersectionofthetotalcostlineandthetotalsalerevenueline.Thi
sisthepointatwhichtheproductioncostbecomesequaltothesalesrevenue.Theareaabovethispoi
ntistheprofitareaandtheareabelowthispointisthelossarea.
1.6 BreakevenAnalysis
BEP(Breakevenpoint)isthepointatwhichthereisnolossorprofittothecompany.Itcanbeexpressedeithe
rintermsofproductionquantityorrevenueleveldependingonhowthecompanystatesitscostequation.

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Manufacturingcompaniesusuallystatetheircostequationintermsofquantity(becausetheyproducesan
dsell)whereasretailbusinessstatetheircostequationintermsofrevenue(becausetheypurchaseandsell)
Whatdoesmeanbreakevenpoint?
Case1.ManufacturingCompanies
Consideracompanywithequation TR=PQ
TC=VQ+FC
AtBEP,TR=TCi.eTR–TC=0
where:
PQe=VQe+FCQe=breakevenquantity
PQe-VQe=FC FC=fixedcost
Qe(P-V)=FC P=unitsellingprice
FC
Qe= P  V V=unitvariablecost

Example
1. Amanufacturingcompanyhasafixedcostof10,000andaunitvariablecostofBirr5.Ifthecompanyc
ansellwhatitproducesatapriceofBirr10,
a. WritetheRevenue,cost&Profitfunctions
b. Findthebreakevenpointintermsofquantity
Answer
a)TC=VC+FCTR=PQProfit(P)=TR–TC
TC=5Q+10,000TR=10Q=10Q–(5Q+10,000)
=5Q–10,000
b)Atbreakevenpoint,TR=TC
10Q=5Q+10,000
5Q–10,000=0

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 10 , 000
Qe= 5
Qe=2000units
i.e.BreakevenQuantityis2000units

TheEffectofChangingOneVariableKeepingOthersConstantonBEP
Casea:FixedCost
AssumefortheaboveproblemFCisdecreasedbyBr5,000,citrusparibus.
5,000
TC=5Q+5,000Qe1= 5 =1,000units
TR=10Q
 FC ↓ Q  
c 
 FC  Q 
c FC & Qe direc
Therefore, have t relationship
Caseb-Unitvariablecost
AssumefortheaboveproblemunitvariablecostdecreasedbyBirr1,citrusparibus

10,000
Qe 2

6 =1,667units
TC=4Q+10,000
TR=10Q
V  Qc  

V  Qe  
Therefore, V&Qehavedirectrelationship
Casec-SellingPrice
AssumefortheaboveproblemsellingpriceisdecreasedbyBirr1,CitrusParibus.
 Qe  10 , 000
4
 2 ,500
TC=5Q+10,000 3 units
TR=9Q
P  Qe 

P  Qe 
Therefore, P&Qehaveindirectrelationship
Intheaboveexampleifacompanycan’tproduceandsell2,000unitsitwillhavethefollowingoptions?
a) DecreasingFC

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 b) Decreasingunitvariablecost
c) Increasingtheunitsellingprice
Iftheorganizationisfacedbetweencasestwoandthree,itispreferabletodecreasetheunitvariablecostbec
auseifweincreasethesellingprice,theorganizationmayloseitscustomers;andalsodecreasingtheFCisa
dvisable.