1.

A tour operator charges Rs 136 per passenger for 100 passengers with a discount
of Rs 4 each for 10 passengers in excess of 100. Determine the number of
passengers that will maximize the amount of money the tour operator receives.

Ans. Let x be the no. of passengers and R(x) be the revenue function. Hence,
maximum money would be obtained by the tour operator when the function R (x)
should be maximized to find the no. of passengers Let the revenue from each
passenger (in case of the no. of passengers > 100) => (136 - 4 )/ 10(x-10) for x=100
The total revenue function R(x), is given by R(x) = 136 x for x = 100 R(x) = x [136 -
4/10 (x-10)] =136 x-2/5 x^2+40 x...

Most businesses are “for-profit” businesses, meaning that they

operate to make money. There are no guarantees in business,
and the future is always uncertain. What if you have to pay your
employees higher wages? What if the cost of the raw material
you use in production decreases? What if you sell more or less
items than expected? Successful business managers plan for the
future and perform many “what-if” scenarios to answer these
types of questions. This section develops a model for calculating
total net income based on total revenues and total costs. The
model allows managers to analyze various scenarios and
determine the impact on profitability.

However, simply looking at the fixed costs, variable costs,

potential revenues, contribution margins, and typical net income
is not enough. Ultimately, to have any chance of staying in
business all costs in a business need to be recovered through
sales. Do you know how many units have to be sold to pay your
bills? The answer to this question helps assess the feasibility of
your business idea.

Revenue and Cost Functions

Recall from the previous section that total costs (TC𝑇𝐶) are the
total costs (fixed and variable) incurred by a business and total
revenue (TR𝑇𝑅) is the amount of money received from the sales
of the items produced and sold.
TC=FC+VC×xTR=S×x𝑇𝐶=𝐹𝐶+𝑉𝐶×𝑥𝑇𝑅=𝑆×𝑥

where

 TC𝑇𝐶 is the total costs. The total costs is the sum of all
of costs incurred by the business.
  FC𝐹𝐶 is the fixed costs. These are the costs that do not
change regardless of the level of production.
 VC𝑉𝐶 is the variable cost per unit. The unit variable
cost is the typical or average variable cost associated with
an individual unit of output.
 TR𝑇𝑅 is the total revenue. This is how much money or
gross income the sale of the product at a certain output
level brings into the organization.
 S𝑆 is the selling price per unit. The unit selling price of
the product.
 x𝑥 is the number of units produced. This is the number
of units produced or sold or the total output that incurred
the total variable costs.

Because the number of units, x𝑥, varies, we can think of the total
costs and total revenue formulas as functions of the number of
units, x𝑥.

Net Income using Revenue and Cost Functions

The net income (NI𝑁𝐼) is the difference between the total
revenue and the total costs.
NI=TR−TC𝑁𝐼=𝑇𝑅−𝑇𝐶

Note that many companies use the terms net earnings or net
profit instead of the term net income. Net income is based on a
certain level of output. Here, we assume that the number of units
produced or purchased exactly matches the number of units that
are output or sold by the company. In other words, there is no
inventory, and its associated costs, to consider.
Substituting in the functions for TR𝑇𝑅 and TC𝑇𝐶, we can express
the net income NI𝑁𝐼 in terms of the number of units x𝑥.
NI=S×x−(FC+VC×x)𝑁𝐼=𝑆×𝑥−(𝐹𝐶+𝑉𝐶×𝑥)

where

 NI𝑁𝐼 is the net income. The amount of money left over

after all costs have been paid is the net income. If the
number is positive, then the business is profitable. If the
number is negative, then the business suffers a loss.
 S𝑆 is the selling price per unit. The unit selling price of
the product.
  x𝑥 is the number of units produced. This is the number
of units produced or sold or the total output that incurred
the total variable costs.
 FC𝐹𝐶 is the fixed costs. These are the costs that do not
change regardless of the level of production.
 VC𝑉𝐶 is the variable cost per unit. The unit variable
cost is the typical or average variable cost associated with
an individual unit of output.

There are three scenarios to consider.

 Total revenue is greater than total costs (TR>TC𝑇𝑅>𝑇𝐶).

In this case the net income is positive (NI>0𝑁𝐼>0) and the
business makes a profit.
 Total revenue is less than total costs (TR<TC𝑇𝑅<𝑇𝐶). In
this case the net income is negative (NI<0𝑁𝐼<0) and the
business incurs a loss.
 Total revenue equals total cost (TR=TC𝑇𝑅=𝑇𝐶). In this
case the net income is zero (NI=0𝑁𝐼=0). This is the break-
even point.

EXAMPLE
A company’s monthly fixed costs for producing an item are $12,000. The
variable cost per unit is $10. The company sells the item for $25 each.

1. What is the net income if the company produces and sells 1,000
units next month? Did they make a profit or loss at this level of
output?
2. What is the net income if the company produces and sells 500
units next month? Did they make a profit or loss at this level of
output?
3. How many units must be produced and sold for a profit of $2,400?
4. How many units must be produced and sold for a loss of $2,850

Solution:

Step 1: The given information is

FC=$12,000VC=$10S=$25𝐹𝐶=$12,000𝑉𝐶=$10𝑆=$25
The total revenue function is
TR=S×x=25×x𝑇𝑅=𝑆×𝑥=25×𝑥
The total cost function is
TC=FC+VC×x=12,000+10×x𝑇𝐶=𝐹𝐶+𝑉𝐶×𝑥=12,000+10×𝑥
Step 2: Calculate the net income for x=1,000𝑥=1,000.
TR=25×1,000=$25,000TC=12,000+10×1,000=$22,000NI=TR−T
C=25,000−22,000=$3,000𝑇𝑅=25×1,000=$25,000𝑇𝐶=12,000+
10×1,000=$22,000𝑁𝐼=𝑇𝑅−𝑇𝐶=25,000−22,000=$3,000
At 1,000 units, the net income is $3,000. Because the net income is
positive, the company made a profit at 1,000 units.
Step 3: Calculate the net income for x=500𝑥=500.
TR=25×500=$12,500TC=12,000+10×500=$17,000NI=TR−TC=
12,500−17,000=−
$4,500𝑇𝑅=25×500=$12,500𝑇𝐶=12,000+10×500=$17,000𝑁𝐼
=𝑇𝑅−𝑇𝐶=12,500−17,000=−$4,500
At 500 units, the net income is -$4,500. Because the net income is
negative, the company incurs a loss at 500 units.
Step 4: Calculate the units for NI=2,400𝑁𝐼=2,400. Because this is a
profit the net income is positive.
NI=S×−
(FC+VC×x)2,400=25×x−(12,000+10×x)2,400=25×x−12,000−1
0×x14,400=15×x14,40015=x960=x𝑁𝐼=𝑆×−
(𝐹𝐶+𝑉𝐶×𝑥)2,400=25×𝑥−(12,000+10×𝑥)2,400=25×𝑥−12,000
−10×𝑥14,400=15×𝑥14,40015=𝑥960=𝑥
A profit of $2,400 occurs when 960 units are produced and sold.
Step 5: Calculate the units for NI=−2,850𝑁𝐼=−2,850. Because this is
a loss the net income is negative.
NI=S×−(FC+VC×x)−2,850=25×x−(12,000+10×x)

𝑆×−(𝐹𝐶+𝑉𝐶×𝑥)−2,850=25×𝑥−(12,000+10×𝑥)
−2,850=25×x−12,000−10×x9,150=15×x9,15015=x610=x𝑁𝐼=

−2,850=25×𝑥−12,000−10×𝑥9,150=15×𝑥9,15015=𝑥610=𝑥
A loss of $2,850 occurs when 610 units are produced and sold.

You run a small business that produces custom-ordered t-shirts.

You have fixed costs of $2,700 per month. Each t-shirt has a
variable cost of $25. You sell each t-shirt for $40.

1. What is the net income for a month in which you produce

and sell 150 shirts? Would you incur a profit or loss at this
level of production?
2. You decide to increase your selling price to $45 per shirt.
What is the net income for 150 shirts with this higher
selling price? Are you making a profit or loss?
 3. One of your suppliers has lowered their prices. This
decreases the variable cost per shirt to $18. What is the
net income for 150 shirts with this lower variable cost? Are
you making a profit or loss? (Assume the original $40
selling price).

Solution:

Step 1: The given information is

FC=$2,700VC=$25S=$40𝐹𝐶=$2,700𝑉𝐶=$25𝑆=$40

The total revenue function is

TR=S×x=40×x𝑇𝑅=𝑆×𝑥=40×𝑥

The total cost function is

TC=FC+VC×x=2,700+25×x𝑇𝐶=𝐹𝐶+𝑉𝐶×𝑥=2,700+25×𝑥
Step 2: Calculate the net income for x=150𝑥=150.
TR=40×150=$6,000TC=2,700+25×150=$6,450NI=TR−TC=6,00
0−6,450=−

𝑇𝐶=6,000−6,450=−$450
$450𝑇𝑅=40×150=$6,000𝑇𝐶=2,700+25×150=$6,450𝑁𝐼=𝑇𝑅−

At 150 shirts, the net income is -$450. Because the net income is
negative, you incur a loss at 150 shirts.
Step 3: Calculate the net income
for x=150𝑥=150 with S=$45𝑆=$45.
TR=45×150=$6,750TC=2,700+25×150=$6,450NI=TR−TC=6,75

𝑁𝐼=𝑇𝑅−𝑇𝐶=6,750−6,450=$350
0−6,450=$350𝑇𝑅=45×150=$6,750𝑇𝐶=2,700+25×150=$6,450

With the selling price per shirt at $45, a profit of $350 is made
when 150 shirts are produced and sold.
Step 4: Calculate the net income
for x=150𝑥=150 with VC=$18𝑉𝐶=$18.
TR=40×150=$6,000TC=2,700+18×150=$5,400NI=TR−TC=6,00

𝑁𝐼=𝑇𝑅−𝑇𝐶=6,000−5,400=$600
0−5,400=$600𝑇𝑅=40×150=$6,000𝑇𝐶=2,700+18×150=$5,400

With the variable cost per shirt at $18, a profit of $600 is made
when 150 shirts are produced and sold.
A movie theater holds 1000 people. With the ticket price at $8
during the week, the attendance at the theater has been 200
people.
A market survey indicates that for every dollar the ticket price is
lowered, attendance increases by 50.
What ticket price will maximize the revenue?

Solution

If to translate the condition in the Math language, it means:

With the ticket price changing according to the function P = 8-z

dollars the attendance changes as N = 200 + 50z people.
Express the revenue as function of z and find its maximum.

Notice that my variable "z" relates to the variable "x" of the

original condition as z = 8-x, or x = 8-z.
But my reformulation in terms of "z" is actually in the precise
accordance with the first part of the condition and is more
understandable.

To solve the problem, you must know that the revenue is the product
P*N, i.e. Revenue R = (8-z)*(200+50z). Or, which is the same, R =

1600 - 200z + 400z - 50z^2, or R = .

(1) Now, let me remind you that for general quadratic function f(x) =

the minimum/maximum is at x = . In

your case the maximum is at z = = = Plot y =

2. It means that the optimal price of the tickets is P = 8-2 = 6 dollars.
The maximum revenue is the value of the quadratic function (1) at z Reve
nue is presented as the function of
= 2" R = = -200 + 400 + 1600 = the projected decrease of price
1800 dollars. Answer. The revenue is maximal $1800 at the ticket
price $6. (The attendance then is 200 + 50*2 = 300 and (for the
check purpose) $6*300 = $1800).

Problem 2

A cable television firm presently serves 6,300 households and

charges $14 per month. A marketing survey indicates that
each decrease of $1 in the monthly charge will result in 630 new
customers. Find the value of maximum monthly revenue.
Solution

Let C(x) = 14 -x be the monthly charge for one single

customer as the function of the projected decrease of
"x" dollars. Let N(x) = 6300 + 630x be the
number of customers as the function of the same
variable: the projected decrease of "x" dollars. Then
monthly revenue R is the product R = C*N, or R =
(14-x)*(6300 + 630x), (1) and we need to find the
maximum of this function. Write the function (1) in
the general form for the quadratic function R(x) =

, or

Plot y = R(x) =
R(x) = . Now, let
me remind you that For the general quadratic
T
he plot represents the revenue as the
function f(x) = with the negative function of projected decrease of
coefficient a < 0 the theory predicts the maximum at charge:

x= . In our case the maximum will be at x =

= 2.
It means that the maximum is predicted at the $2 dollars decreased charge
of $14 - $2 = $12.

The number of customers then will be 6300 + 2*630 = 7560, and the total
revenue will be $12*7560 = $90720.

You can check that this revenue is the same as calculated in

accordance with the function R(x) = at x =

2:

R(2) = = 90720.

Answer. The value of monthly charge that results in maximum monthly

revenue is $12 dollars.

Problem 3

Total profit P is the difference between total revenue R and total

cost C.
Given the following total-revenue and total-cost functions R(x)
= and C(x) = ,
find the total profit, the maximum value of the total profit, and
the value of x at which it occurs.

Solution

Profit = Revenue - Cost:

P(x) = (1000x - x^2) - (3400+ 10x).

Remove parentheses

P(x) = 1000x - x^2 - 3400 - 10x.

Combine like terms

P(x) = -x^2 + 1000x - 10x - 3400

A quadratic function

P(x) = -x^2 + 990x - 3400

Max profit occurs on the axis of symmetry, x = -b/(2a):

x =

x = 495 units will produce max profit.

Find that actual profit:

P(x) = -(495^2) + 990(495) - 3400

P(x) = -245025 + 490050 - 3400

P(x) = $241,625 is the value of the total profit.

Problem 4

Each orange tree grown in California produces 630 oranges per

year if not more than 20 trees are planted per acre.
For each additional tree planted per acre, the yield per tree
decreases by 15 oranges. How many trees per acre
should be planted to obtain the greatest number of oranges?
Solution

For the number of oranges per one tree, "n", as the function of the number
of trees per acre, "t", the condition gives this formula:

n = 630 - 15*(t-20).

Then the number of oranges per acre is

O(t) = n*t = t*(630 - 15*(t-20)) = 630t - 15t^2 + 300t = -15t^2 + 930t.

They ask to find the maximum of this quadratic function of t.

From the general theory, the maximum is achieved at t = =

= = 31.

So, 31 tree per acre provide the maximal total number of oranges per acre.

This maximum is equal to O(31) = 31*(630-15*(31-20)) = 31*(630-15*(-11)) =

21*(630+15*11) = 16695.

Answer. 31 trees per acre provide the maximal number of oranges of 16695.
Plot y = t*(630 - 15*(t-20))

Problem 5

A travel agency offers an organization an all-inclusive tour for

$800 per person if not more than 100 people take the tour.
However, the cost per person will be reduced to $5 for each
person in excess of 100. How many people should take the tour.
In order for the agency to receive the largest gross revenue, and
what is the largest gross revenue?

Solution

The condition says that in the domain n >= 100 the following formula works
for the single ticket price P:

P = 800 - 5*(n-100) dollars.

The revenue R is the product R = n*P, or

R = n*(800-5*(n-100)) = 800n - 5n^2 + 500n = 1300n - 5n^2 = 5n*(260-n).

The function R(x) = 5x*(260-x) is the parabola, and you need to find its
maximum.

This parabola has the roots x = 0 and x = 260.

Therefore, its maximum is exactly mid-point between the roots, i.e. x =

130.

Thus, the optimal number of people in the tour is 130: this number gives
the maximum to Revenue.

To calculate the value of this maximum, substitute x = n = 130 into the

parabola equation

R(n) = 5n*(260-n) = 5*130*130 = 84500 dollars.

Problem 6

A real estate company owns 228 efficiency apartments, which

are fully occupied when the rent is $990 per month.
The company estimates that for each $25 increase in rent, 5
apartments will become unoccupied. What rent should be
charged
so that the company will receive the maximum monthly income?

Solution

The condition says "for each $25 increase in rent, 5 apartments will become
unoccupied".

It is the same as (is equivalent) to say that for each $5 increase in rent,
1 apartment will become unoccupied.

So inter-relation between the number of occupied apartments "n" and the

rent cost "p" (payment, in dollars) is THIS :

if the price is p(m) = 990 + 5m, then the number of occupied

apartments is n = 228 - m, where "m" is an integer number (a parameter).

It means that the revenue is

R(m) = p*n = p(m)*n(m) = (990 + 5m)*(228-m).

It is a quadratic function of m. It is more convenient to present it as
the quadratic function of the real argument x

R(x) = (990 + 5x)*(228-x).

This quadratic function, obviously, is open downward (has negative

coefficient at x^2); so, it has maximum, and our goal is to find this
maximum.

Note that the roots of this quadratic polynomial are easy to find by
equating each factor to zero.

It gives the zeroes x = = -198 and x = 228.

The maximum of the quadratic function is achieved exactly mid-way between

the zeroes - so the maximum is at x= = 15.

It means that the optimal price is p(m) = p(15) = 990 + 5m = 990 + 5*15 =
1065 dollars,

which provides the number of occupied apartments n(m) = n(15) = 228 - m =

228 - 15 = 213.

Then the revenue is 213*1065 = 226845 dollars.

Compare it with the revenue at full occupancy: 228*990 = 225720 dollars.