UNIT 1: LINEAR EQUATIONS AND THEIR INTERPRETATIVE

APPLICATIONS IN BUSINESS

1.1 INTRODUCTION

Mathematics, old and newly created, coupled with innovative applications of the rapidly

evolving electronic computer and directed toward management problems, resulted in a new field

of study called quantitative methods, which has become part of the curriculum of colleges of

business. The importance of quantitative approaches to management problems is now widely

accepted and a course in mathematics, with management applications is included in the core of

subjects studied by almost all management students. This manual develops mathematics in the

applied context required for an understanding of the quantitative approach to management

problems.

1.2 Linear Equations

Equation: - A mathematical statement which indicates two algebraic expressions are

equal

Example: Y = 2X + 3

Algebraic expressions: - A mathematical statement indicating that numerical quantities

are linked by mathematical operations.

Example: X + 2

Linear equations: - are equations with a variable & a constant with degree one.

- Are equations whose terms (the parts separated by +, -, = signs)

- Are a constant, or a constant times one variable to the first power

Example: 2X – 3Y = 7

- the degree (the power) of the variables is 1

1
- the constant or the fixed value is 7

- the terms of the equation are 2X and 3Y separated by – sign

However 2X + 3XY = 7 isn’t a linear equation, because 3XY is a constant times the product of 2
variables.

* No X2 terms, No X/Y terms, and no XY terms are allowed.

- Linear equations are equations whose slope is constant throughout the line.

- The general notion of a linear equation is expressed in a form Y = mx + b where m =

slope, b = the Y- intercept, Y = dependent variable and X = independent variable.

If Y represents Total Cost, the cost is increased by the rate of the amount of the slope m.

Y rise  fall  Y Y
Slope (m) =   2 1 if X1  X2
X run X 2  X1

Slope measures the steepness of a line. The larger the slope the more steep (steeper) the line is,

both in value and in absolute value.

Y Y m = undefined

+ive slope

m=0

-ve slope
X X

- A line that is parallel to the X-axis is the gentlest of all lines i.e. m = 0

- A line that is parallel to the Y-axis is the steepest of all lines i.e. m = undefined or

infinite.

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.

2
1.2.1 Developing equation of a 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-point form

1. The slope-intercept form

This way of developing the equation of a line involves the use of the slope & the intercept to

formulate the equation.

Often the slope & the Y-intercept for a specific linear function are obtained directly from the

description of the situation we wish to model.

Example # 1

Given Slope = 10

Y-intercept = +20, then

Slope-intercept form: the equation of a line with slope = m and Y-intercept b is

Y = mx + b

Y = 10X + 20
Interpretative Exercises
#2 Suppose the Fixed cost (setup cost) for producing product X be br. 2000. After setup it costs

br. 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 & interpret the number

3. State the Y-intercept of the line & interpret the number

#3. A sales man has a fixed salary of br. 200 a week In addition; he receives a sales commission

that is 20% of his total volume of sales. State the relationship between the sales man’s total

weekly salary & his sales for the week.

3
 Answer Y = 0.20X + 200

2. The slope point form

The equation of a non-vertical line, L, of slope, m, that passes through the point (X1, Y1) is :

defined by the formula Y – Y1 = m (X – X1)

Y – Y1 = m (X – X1)

Example #1  Y – 2 = 4 (X – 1)

Given, slop = 4 and Y – 2 = 4X - 4

Point = (1, 2) Y = 4X – 2

#2 A sales man earns a weekly basic salary plus a sales commission of 20% of his total sales.

When his total weekly sales total br. 1000, his total salary for the week is 400. derive the formula

describing the relationship between total salary and sales.

Answer Y = 0.2X + 200

#3 If the relationship between Total Cost and the number of units made is linear, & if costs

increases by br. 7.00 for each additional unit made, and if the Total Cost of 10 units is br. 180.00.

Find the equation of the relationship between Total Cost (Y) & number of units made (X)

Answer: Y = 7X + 110

3. Two-point form
Two points completely determine a straight line & of course, they determine the slope of the line.

Hence we can first compute the slope, then use this value of m together with either point in the

point-slope form Y – Y1 = m (X – X1) to generate the equation of a line.

 By having two coordinate of a line we can determine the equation of the line.

 Y Y 
Two point form of linear equation: (Y – Y1) =  2 1  X  X 1 
 X 2  X1 
Example #1 given (1, 10) & (6, 0)

4
 0  10  10
First slope =    2 , then
6 1 5

Y – Y1 = m (X – X1)  Y – 10 = -2 (X – 1)

Y – 10 = -2X + 2

Y = -2X + 12
#2 A salesman has a basic salary &, in addition, receives a commission which is a fixed
percentage of his sales volume. When his weekly sales are Br. 1000, his total salary is br. 400.
When his weekly sales are 500.00, his total salary is br. 300. Determine his basic salary & his
commission percentage & express the relationship between sales & salary in equation form.
Answer: Y = 0.2X + 200

#3 A printer costs a price of birr 1,400 for printing 100 copies of a report & br. 3000 for printing

500 copies. Assuming a linear relationship what would be the price for printing 300 copies?

Answer: Y = 4X + 1000

Cost = 4.0 (300) + 1000 = br. 2200

1.2.2 Special formats

a) Horizontal & vertical lines
When the equation of a line is to be determined from two given points, it is a good idea to

compare corresponding coordinates because if the Y values are the same the line is horizontal &

if the X values are the same the line is vertical

Example: 1 Given the points (3, 6) & (8, 6) the line through them is horizontal because

both Y-coordinates are the same i.e. 6

The equation of the line becomes Y = 6,which is different from the form Y = mx + b

If the X-coordinates of the two different points are equal

5
Example (5, 2) & (5, 12) the line through them is vertical, & its equations is X = 5 i.e. X is

equal to a constant. If we proceed to apply the point slope procedure, we would obtain.

12  10 2
Slope (M) =    & if m =  infinite the line is vertical & the form of the
55 0

equation is: X = constant

b) Parallel & perpendicular lines ( and )

Two lines are parallel if the two lines have the same slope, & two lines are perpendicular if the

product of their slope is –1 or the slope of one is the negative reciprocal of the slope of the other.

However, for vertical & horizontal lines. (They are perpendicular to each other), this rule of M 1

(the first slope) times M2 (the second slope) equals –1 doesn’t hold true. i.e. M1 x M2  -1

Example: Y = 2X – 10 & Y = 2X + 14 are parallel because their slope are equal i.e. 2

Y = 3/2X + 10 & Y = -2/3X + 100 are perpendicular to each other because the

3 2
multiplication result of the two slope are –1 i.e. x  1
2 3
c) Lines through the origin
Any equation in the variables X & Y that has no constant term other than zero will have a graph

that passes through the origin. Or, a line which passes through the origin has an X-intercept of (0,

0) i.e. both X and Y intercepts are zero.

6
1.3 Application of linear equations

1.3.1 linear cost output relationships – VC, FC, TC, AC, MC, TR, :

TR/TC profit TR TC = TVC + TFC

Or TP region TR = PQ

TC TP = TR - TC
Loss T
region E BEP = PQ – (VC + FC)
TVC H
A F G FC = PQ – Q.VC - TFC
TC
TFC = Q (P – VC) - FC
B C D G(No of units)
Where Q = units
product & units
sold in revenue

TC = Total Cost

FC = Fixed Cost

VC = Unit variable

Cost

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.

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

7
 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.

4. TFC remains constant regardless of the number of units produced. Given that there is no

any difference in scale of production.

5. 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.

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

equal to marginal cost)

7. 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.

8. As Quantity increases TR increases at a rate of P. and average revenue remains constant.

TR P. Q
AR =  = P  AR = P in linear functions
Q Q

1.2.2 Breakeven Analysis

Break-even point is the point at which there is no loss or profit to the company. 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

8
TC = VC + FC / Total cost = Variable cost + Fixed cost

TR = PQ/ Total Revenue = Price x Quantity

At Break-even point, TR = TC i.e TR – TC = 0

PQ = VC + FC where Qe = Breakeven Quantity

PQ – VC.Q = FC FC = Fixed cost

Q (P – VC) = FC P = unit selling price

FC
Qe = VC = unit variable cost
P  VC

TR

TC/TR TC

Q
FC
Qe =
P  VC

Example #1 A manufacturing Co. has a Total Fixed Cost of Br. 10,000 & a Unit Variable Cost of

Br. 5. if the co. 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

9
Answer
a) TC = VC + FC TR = PQ Profit() = TR – TC

TC = 5Q + 10,000 TR = 10Q = 10Q – (5Q + 10,000)

= 5Q – 10,000

b) At break even point TR = TC

10Q = 5Q + 10,000

5Q – 10,000 = 0

10 ,000
Qe =
5
Qe = 2000 units

i.e. Breakeven Quantity is 2000 units

Sales volume = 2000 X 10 = 20,000 br.

25000 TR = 10Q 

20000 TC = 5Q + 10000 TVC = 5Q

15000 TVC T = 5Q - 10000

10000

5000 TFC

0
1000 2000 3000 4000 5000 Q (no. of units produced
& sold)

-5000 -

-10000 -

Interpretation:

When a co. produces & sells 2000 units of output, there will not be any loss or gain (no profit, no

loss)

10
Example 2. The cost and revenue information of ABC Company are as follows:
Fixed Cost = Br 120,000
Unit Price = Br. 50
Variable Cost/unit (Vc/unit) = Br. 30
Find the break-even point in terms of unit and sales in Birr.

Solution:
Fixed Cost
Break Even Point-BEP (quantity) =
Price/unit  VC/unit
120 ,000 120 ,000
BEP = =
50  30 20
= 6,000 units

BEP (In Birr) = 6,000 X Br. 50 = Br. 300,000.

This can be depicted graphically as follows:

TR

A
TC

Br. 300,000 BEP

6,000 Quantity

Where: TR= total revenue A= represents the profit region

TC= total cost B= represents the loss region

BEP= break even point Vc/unit = Variable cost per unit

11
INTERPRETATION
The company, if it wants to be profitable, should produce and sale more than 6, 000 units of
output. For example, If the external and internal environment force it to produce only 3,000 units
of the product the company will incur a lose. So it has to take some short-term as well as long
term measures to correct the situation.

12