Chapter 1

Linear Equation and their Interpretive Application

Concepts of Equations, Functions and Graphs
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 and financial problems is now widely accepted and a course in mathematics, with
financial decision purpose.
1.2 Linear Equations
Equation: - A mathematical statement which indicates two algebraic expressions is equal
Example: Y = 2X + 3
Algebraic expressions: - A mathematical statement is indicating that numerical quantities are linked by
mathematical operations (+, -, x, /). 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 X and Y is one (1)
- the constant or the fixed values are 2, 3, 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.
e.g.s of linear equation e.g.s of none linear equations
i) c = ax+b ; a≠ 0 - c = ax2 - c = by1/2
ii) c = ax+by; a,b≠0 - c = (x+1) (x+1) - c = X/Y
iii) c = ax+by+bz; a,b,d≠0 - c = (x-1) (x+1) - c = XY
- assume x,y and z are variables but a, b, c and d are constant
- 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.
 The general notion of a linear equation is expressed in a form Y = mx + b
Y=mx+b where y = dependent variable
The expression is x = in dependent variable
y is the function of x/ or y in terms of x m = slope
b = y-intercept
E.g.1.1The sum of money paid by extension students of collage of business and economics is 26br per credit
hour plus 10br as a registration fee. If Y represents the total sum of money and X represents the N o of credit
hours taken in one semester. Write the equation for Y in terms of X
Linear Function:- it is a mathematical word that create a correspondence or relationship b/n two variable s
for every value of the independent variable there will be one and only one values of the dependent variable
corresponding to it.
 X is the independent variable and plotted on a horizontal axis.
 Y is the dependent variable and plotted on a vertical axis.
 Thus where we plot points, the value of X can be chosen independently, but the corresponding values of
Y depend on the values chosen for X.

Business Math’s Chapter 1 Short Note and Examples Page 1 of 9

Graphs: - are two dimensional diagram
To sketch the graph we need to find X and Y intercept and the constant straight line slope.
How to find From the general equation of a line y = mx+b
x-intercept; y=0 x-intercept = -b/m
y- intercept; x=0 y- intercept = b
If Y represents Total Cost, the cost is increased by the rate of the amount of the slope m.
Slope of the line: - it is a measure of inclination, steepness or direction.
 Numerically, the slope of a straight line is the ratio of the rise (fall) to the run to b/n two pointes on the
line.
Y rise  fall Y Y
  2 1
Slope (m) = X run X 2  X 1 if X  X
1 2
Where: - Rise/fall = is the vertical separation.
Run = is the horizontal separation
The slope (generally called m) of a straight line or segment joining at least two pointes (x1 , y1 ) and (x2 , y2 )
Slope (m) = Differences of y’s/Differences of x’s = y2 -y1 /x2 -x1
 There are four forms of slopes
1. Positive value of a slope:- it is a rising slope or a slant up-ward to the right.
2. Negative value of a slope:- it is a falling slope or a slant down-ward to the right.
3. Zero value of a slope :- it is a horizontal line or a gentle line
 All horizontal line segments has a slope of zero because the y-coordinates of two points o a horizonta l
segment are equal (so, the difference of equal number is zero)
4. Undefined value of a slope:- it is a vertical line
 A vertical line has infinite slope because a straight up-and-down line is the steepest one. The x-coordinates
of two points on a vertical segment are equal (so, the difference of equal number is zero.)
Note: The larger the slope the more steep (steeper) the line is, both in value and in absolute value.
m = undefined
Y m = +ve slope Y

m=0
m = -ive slope
X 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.
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.
E.g.1.2 An agency rents cars for one day and charges br. 22 plus 20 cents per mile the car is driven.
a) Write the equation for one day’s rental, y intermesh of x, the number of miles driven.
b) Interpret the slope and the y-intercept.
c) What is the renters cost per mile if a car is driven 100 miles?

Business Math’s Chapter 1 Short Note and Examples Page 2 of 9

 2. The slope point form
A straight line equation can be written directly if the slope “m” and a particular point the y- intercept “b” are
given. The equation then is y = mx + b
If the given point is not the y – intercept, we can easily determine this intercept from the above slope intercept
form. Assume we have m and p1 (x1 , y1 ), we need to follow the following steps.
 Step1: Establish/Write the partial equation.
 Step2: Compute/Calculate the y- intercept.
 Step3: Develop the complete equation.
E.g.1.3 Find the equation of the line that has a slope of 3 and that passes through the point (3,4)
E.g.1.4 If the relationship between total cost (TC) and the number of unit made is linear, if cost increases by
3 br. for each additional units made and if the TC of 10 units is br. 40. Find the equation of the relations hip
between TC and units made.
E.g.1.5 A sales man earns a monthly base salary plus a sales commission of 20% of his total sales. When his
total monthly sales volume is 1,000 and total salary is br. 400.
a) Drive the formula describing the relationship between total salary and sales volume.
b) What is the monthly fixed salary of sales man and interpret?
c) What is the slope of the line and its interpretation?
3. Two Point Form
Two points completely determine a straight line and of course, they determine the slope of the line. Hence we
need the following steps to develop the complete equation of the line.
 Step1: Compute/Calculate the slope
 Step2: Establish/Write the partial equation.
 Step3: Compute/Calculate the y- intercept.
 Step4: Develop the complete equation.
E.g.1.6 A publisher asks a printer for quotations on the cost of printing 1,000 and 2,000 copies of a book. The
printer quotes br. 4,500 for 1,000 copies and br. 7,500 for 2,000 copies. Assume the cost y is linearly related
to x, the number of books printed.
a) Write the coordinates of the given point
b) Develop the equation
E.g.1.7 As the number of units manufactured increases from 100 to 200, manufacturing cost increases from
br. 350 to br. 650. Assume that the given data establish the relationship cost y and the number of units made
x and assume that the relationship is linear. Find the equation of the relationship.

Application of Linear Equations (Cost- Output Relationship)

 Costs:- are producing goods/ providing services
 Variable Cost (VC):- represents the cost of those factors that vary directly with output e.g. labor, raw
material, power etc.
 Fixed Cost (FC):- remains constant at all levels of output. These are unavoidable costs e.g. rent, capital
(interest), salary etc.
 Total Cost (TC):- at each level of output is made up of fixed cost (FC) and variable cost (VC). So, TC =
FC +VC
 Average Cost (AC):- at each level of output (Q) is equal to total cost divided by the corresponding level
of output. AC = TC/Q (here AC = ATC)
 Average Fixed Cost (AFC):- at each level of output (Q) is equal to fixed cost divided by the
corresponding level of output. It falls as output increases, it is continually dow-ward slopping. AFC =
FC/Q
 Average Variable Cost (AVC):- at each level of output (Q) is equal to variable cost divided by the
corresponding level of output. First fall and then rising; AVC = VC/Q
 Average Total Cost (ATC):- at each level of output (Q) is the sum of the corresponding values of AFC
and AVC. ATC = AFC +AVC = FC/Q + VC/Q = TC/Q.

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 Marginal Cost (MC):- measures the change in total cost brought about by a one unit change in
production. MC = TC/Q = TC2-TC1/Q2-Q1
 Total Revenue (TR):- is the multiple of price (P) and quantity (Q); TR = PQ
 Total Profit (TP):- is the difference of TR and TC; TP = TR – TC
 Average Revenue (AR):- AR =TR/Q = PQ/Q = P = price per unit. Note: as Q increases TR increase by
price per unit
 Marginal Revenue (MR):- MR = TR/Q = (PQ)/Q = P
 Average Profit (AP):- AP = TP/Q = (TR-TC)/Q = TR/Q –TC/Q = ATR –ATC
 Marginal Profit (MP):- MP = TP/Q = (TR-TC)/Q = TR/Q - TC/Q then, MP = MR-
MC
 Average Variable Cost (AVC):- is cost per unit because
AVC = TVC/Q = VC/Q but TVC = VC = VC/u.Q so,
AVC = (VC/u.Q)/Q = VC/u = MC =m (slope)
Graph showing the relationship b/n Cost, Revenue and Profit
TR/TC profit TR TC = TVC + TFC
Or TP region TR = PQ
TC TP = TR – TC
Loss T = PQ – (VC + FC)
region E BEP = PQ – Q.VC/u – TFC
TVC H = Q (P – VC) – FC
A F G FC Where Q = units product &
TC units sold in revenue
TFC TC = Total Cost
B C D Q (No. of units) FC = Fixed Cost
VC/u = Unit variable Cost
Interpretation of the graph:
Assumption: all equations TC, TR and TP are assumed to be linear
1. The vertical distance between AB, FC, GD is the same because Fixed Cost is the same at any levels of output.
2. The vertical line EF < TG since the variable costs vary with the level of production. As production
increases total cost will increase with value of total variable cost (TVC)
3. Total Revenue function passes through the origin because there is no revenue without sales and
production, but there is cost without production (because of Fixed Cost) & the TC function starts from
point A & doesn’t pass through the origin
4. 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.
5. TFC remains constant regardless of the number of units produced. Given that there is no any differe nce
in scale of production.
6. 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.
7. As production increases TC increases by the rate equal to the AVC = MC (average cost equal to marginal cost)
8. AVC is the same throughout 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.
9. As Quantity increases TR increases at a rate of P. and average revenue remains constant.
E.g.1.8 If total factory cost of making x units of product is given by y = 3x+20 and if 50 units are produced
a) What is the variable cost per unit (VC/u)
b) What is the variable cost (VC)
c) What is the total cost (TC)
d) What is the average cost (AC)
e) What is the marginal cost (MC)
f) What is TP, AR, AP, MR, MP assume all the units produced are sold at br. 10 selling price
Business Math’s Chapter 1 Short Note and Examples Page 4 of 9
Solution
Given f. TP = TR – TC = PQ –(VC + FC )
Cost function y = 3x+20 = 10x50 –(150+20) = 500-170 =330
Q = 50 units AR = TR/Q = 500/50 = 10; AR = P; So, AR = 10
m = Vc/u = 3 AP = TP/Q = 330/50 = 6.6
b = FC = 20 P = price = 10 br AP = AR-AC; AP = 10-3.4 = 6.6
a. Vc/u = m = 3 MR = TR/Q = (PQ)/Q = P
b. VC = Vc/u x Q; VC = 3x50 = 150 MR = AR = P –price per unit So, MR = 10
c. TC = VC + FC; TC = 150 + 20 = 170 MP = TP/Q = (TR-TC)/Q
d. AC = TC/Q = 170/50 = 3.4 = TR/Q - TC/Q then, MP = MR-MC
e. MC = TC/Q = TC2-TC1/Q2-Q1 So, MP = 10-3 = 7
but MC = m-slope so, MC = 3
E.g.1.9 Home Manufacturing Company has started its operation recent time. The Company has both set up
cost (initial investment) and operating cost. To produce 5 units of furniture it has incurred 450 birr. The
production cost to produce a unit of furniture for br. 150 and the company sales 1 unit of furniture for br. 300.
Given that the revenue, cost and the number of units produced are linearly related.
a) Develop cost, revenue and profit functions
b) Graph these in “a” functions by using the following output 5, 10,15, 20, 25, 30, 35, 40
c) Determine MC, MR & MP if units increases 10 to15
d) Calculate the ATC, AVC, AFC,AP at a production level of 10 units of furniture
 To sketch the graph first determine TR, TC and TP based on the given out put

E.g.1.10 (Assignment) A printer quotes a price of br. 7,500 for printing 1,000 copies of a book and br. 15,000
for printing 2,500copies. Assuming a linear relationship and that 2,000 books are printed.
a) Finding the equation relating the total cost y, to x, the number of books printed.
b) What is the variable cost?
c) What is the fixed cost?
d) What is the variable cost per book?
e) What is the average cost per book?
f) What is the marginal cost of the last book printed?
g) Calculate the ATC, AVC, AFC,

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) whereas retail business state their cost equation in terms of revenue (because they purchase and sell)
Case 1: Manufacturing Companies
Consider a Company with equation
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

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E.g.1.11 A manufacturing factory produces scientific calculator. The company has rented a house at 1,000 br
per month has three permanent workers employed at 200 birr per month each. In addition to these permanent
workers paid 11 birr per unit produced. The raw material requirement per unit produced is 149 birr. Other
expenses (supplies, administrative, etc) which do not change as production rate changed, assume that 800 birr
per year. Assume that costs, revenue and units produced are linearly related. The company has sale a unit of
calculator at 200 birr.
a) Develop cost, revenue and profit function and sketch the graph at these production level 20, 40,60, 80,100
b) Find the Break-Even point in terms of quantity and sales revenue.

The Effect of Changing one Variable & Keeping the Other Constant
Case1:- Changing FC keeping others constant
i) In the example above assume that fixed cost has increased by 10%. What will be the new break even
quantity?
ii) If the fixed cost has decreased by 5,000 birr for same cases. What will be the new break even quantity?
Solution
Based on E.g 1.11 we have the following old given i) FC increased by 10% , the new Qe will be
data FCnew = FCold + 10%x FCold
FC = 20,000 br per Year FCnew = 20,000 + 0.1x20,000 = 22,000
VC/u = 160br/u Qe new = FCnew/( P - VC/u) = 22,000/(200-160)
Qe = 500 units Qe new = 22,000/40 = 550 units
P = 200
ii) FC decreased by 5,000 br , the new Qe will be Qe new = FCnew/( P - VC/u) = 15,000/(200-160)
FCnew = FCold – 5,000 br Qe new = 15,000/40 = 375 units
Fcnew = 20,000 – 5,000 = 15,000 br
Note: FC and Q e have a direct relationship because,
 When FC increase, the new Qe also increase and
 When FC decrease, the new Qe also decrease
Case2:- Changing VC/u, keeping others constant
a) Given example above assume VC/u has increase by 20 birr per unit. What will be the new break even
quantity?
b) VC/u has reduced by 15%. What will be the new break even quantity?
Solution
a) VC/u increased by 20 br, the new Qe will be Qe new = FC /( P - VC/u new) = 20,000/(200-180)
VC/u new = VC/u old + 20 br Qe new = 20,000/20 = 1,000 units
VC/u new = 160 + 20 = 180 br/unit
b) VC/u decreased by 15%, the new Qe will be Qe new = FC /( P - VC/u new) = 20,000/(200-136)
VC/u new = VC/u old – 15% x VC/u old Qe new = 20,000/64 = 313 units
VC/u new = 160 – 0.15x160 = 136 br/unit
Note: VC/u and Qe have a direct relationship because,
 When VC/u increase, the new Qe also increase and
 When VC/u decrease, the new Qe also decrease

Case3:- Changing Price, keeping others constant

Assume the example above and other variables remains constant
1) Because of the company is the sole producer, it has increase price by 20% of the current price per unit.
What will be the new break even quantity?
2) Because of the competitors have arrived, the company decided to reduce the unit price by 20 birr. What
will be the new break even quantity?

Business Math’s Chapter 1 Short Note and Examples Page 6 of 9

 Solution
1) Price (P) increased by 20%, the new Qe will be Qe new = FC /( P new - VC/u) = 20,000/(240-160)
P new = P old + 20% x P old Qe new = 20,000/80 = 250 units
P new = 200 + 0.2x200 = 240 br/unit
2) Price (P) decreased by 20 br, the new Qe will be Qe new = FC /( P new - VC/u) = 20,000/(180-160)
P new = P old – 20 br Qe new = 20,000/20 = 1,000 units
P new = 200 - 20 = 180 br/unit
Note: Price (P) and Qe have inverse relationship because,
 When Price (P) increase, the new Qe is decreased and
 When Price (P) decrease, the new Qe is increase too
Finding the Quantity Level than Profit and Loss
TP = TR - TC Where
TP = P.Q – (VC/u.Q + FC) FC = Fixed Cost
TP = P.Q – VC/u.Q - FC VC/u = variable cost per unit
TP + FC = Q(P-VC/u) Qe = Break - Even point quantity level
Q = TP+FC P = Price
P-VC/u TP = Total Profit
E.g.1.12 Using the calculator manufacturing Company E.g.1.11
a) At what level of production the company can have the level of profit equals to the fixed cost?
b) At what level of output incurs a loss of 5,000 birr?

Case 2 Merchandising /Retail Business

Some businesses manufacture products and sell them. Other businesses buy products from someone else and
then resell them. Both types of businesses sell their products for more than it costs to produce or purchase
them. This price increase is called the Mark-up.
Mark-up:- is expressed both in dollars/birr and in percentages.
 The dollar/birr mark-up is the difference between the selling/retail price and the cost.
Dollar/Birr Mark-Up = Selling/Retail Price – Cost
 Mark-Up in percentages
 Mark-Up as a Function of Cost
Mark-Up percentage as a Function of Cost = Mark-Up x 100%
Cost
 Mark-Up as a Function of Selling Price (Margin)
Mark-Up percentage as a Function of Selling Price = Mark-Up x 100% = Margin
Selling Price
Breakeven Revenue = BEQ X P
Assume a business Firm with product A has the following cost & revenue items.
Variable cost per unit of A = 100 br.
Selling price = 150 br.
Markup = Selling price – Variable cost = 150 – 100 = 50
i. as a function of cost, the markup is 50/100 = 50%
ii. as a function of retail price, the markup is 50/150 = 33.3 % it is also called margin.
Margin Cost of goods sold
The cost of goods sold = 100% - 33.3 % = 66.6%  67%
Selling price CGS
Given other selling expense = 1%of the selling price i.e. 0.01X

Business Math’s Chapter 1 Short Note and Examples Page 7 of 9

So, the TC equation becomes:
Y = 0.68X + FC
Where: X is sales revenue
Y is total cost
Out of 100% selling price 68% is the variable cost of goods purchased & sold
E.g.1.13 A Company purchase a product at Br. 3,000 and resale it at a price of birr 3,500
a) What is the Mark-Up?
b) What is the Mark-Up percentage as a function of selling price?
c) What is the Mark-Up percentage as a function of cost?

Example 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
Solution Selling price 100% Let X represents selling price
Margin 25% Y = total cost
CGS 75% FC = 12000
Comm. Exp. 5% Xe = Breakeven revenue
Total VC 80%
Y = 0.8X + 12000
Break even revenue is obtained by making sales revenue & cost equals
At breakeven point TC = TR Y = mx + b
i.e. Y = X then, unit variable cost
FC FC   VC TVC
or where m  
0.8X + 12000 = X  1  m 1  m P TR
-0.2X = -12000
 When the co. receives br. 60,000 as sales revenue,
X = 60,000 br.
there will be no loss or profit.
FC  
The Breakeven revenue (BER = 1  m ) method is useful, because we can use a single formula for differe nt
goods so far as the company uses the same amount of profit margin for all goods.
FC  
However, in Breakeven quantity method or BEQ = P  V it is not possible and hence we have to use
different formula for different items.
Example #1 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.
3600
Answer: Y = 6000 X + 1000 = 0.6X + 1000
Where Y = Total Cost; X = Total revenue
1000 1000
  2500br.
1  0 .6 0 .4
BER = Xe =
At the sales volume of br. 2500, the company breaks even.
* When the breakeven revenue equation is for more than one item it is impossible to find the breakeven
quantity. It is only possible for one item by Qe = Xe/P
Where Xe = Break even revenue
P = selling price
Qe = Breakeven quantity
Business Math’s Chapter 1 Short Note and Examples Page 8 of 9
To change the breakeven revenue equation in to Breakeven quantity . We have to multiple price by the
coefficient of X. likewise, to change in to breakeven revenue from Break even quantity, we have to divide
the unit VC by price.
Work Sheet and Assignment
Interpretative Exercises
1. 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:
a) Write the equation of this relationship in slope-intercept form.
b) State the slope of the line & interpret the number
c) State the Y-intercept of the line & interpret the number
2. 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. 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
4. 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.
5. 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?

The cover page of your assignment must comprises of; The Institution Name; Department; Course
name; Student Name and ID No.; Program (Regular/Weekend/Evening); Section; Date of Submission.
These all information should be write on your cover page of your assignment.

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