5 Applications of Linear Equations Exercise 5.1 cA Chapter 6: Applications of Linear Equations 7Exercise 5.1 (continued) 7. 0 _[ 3000] 6000 2000 f 5000 | 78,500) 82,000 25000 24000 20000 16000 12000 y= 45x + 5000 8000 4000 peepee © 1000 2000 3000 4000 5000 6000 9. In-each part, rearrange the equation to render it in the form y = lope)x + (intercept) a 2b+3=5a 2b=5a-3 Bigatrs b=$a-3 The slope is $ and the binterceptis. b ¢ a. 11. Ehud earns $1600 per month plus 5% of sales. Then gross earings E= $1500 + 0.05R Expressing this equation in the form y = mx +b E=0.05R + $1500 On a plot of E vs. R, slope = 0.05 and E-intercept = $1500. 68 Business Mathematics in Canada, 6/eExercise 5.1 (continued) 13. a. Given: TR=$6X On a plot of 7Rvs. X, slope = $6 and TR.intercept = $0. b. TC =$2X + $80,000 On a plot of TC vs. X, slope = $2 and TC-intercept = $80,000. c. N= $4X— $80,000 On a plot of NI vs. X, slope = $4 and Neinteroept = — $80,000. d. The steepest line is the one with the largest slope. Therefore, the TR line is steepest. e. The increase in NI per widget sold is the “change in NI" divided by the “change in x. This is just as the slope of the N/ vs. X line. Therefore, Ni increases by $4 for each widget sold. f. The coefficient of X in the 7R equation is the unit selling price, which is unchanged. Therefore, the slope remains unchanged. ‘The coefficient of X in the TC equation is the unit cost. ‘Therefore, the slope decreases (from $2 to $1.75). The coefficient of Xin the T/ equation equals (Unit selling price) — (Unit cost) Therefore, the slope increases (from $4 to $4.25). 3 benettertberepeerberet iprerr err trae X yi 2 | 2 The solution is (X,Y) = (23, =2). Chapter 5: Applications of Linear Equations 68Exercise 5.1 (continued) 17. x=3y=0 The solution is 19, The solution is GoW = (-2, 5), 70 Business Mathematics in Canada, 6/eExercise 5.1 (continued) 21 Tp 3q= 23 fp] o | 6 |g: | -7.67 | 633 —2p-3q=5 Rl o | 5 4: | -87 | 567 The solution is Exercise 5.2 1. a. Variable cost e. Fixed cost b. Fixed cost f Mixed cost c. Mixed cost g. Natiable cost d. Variable cost h. Fixed cost 3, Total variable costs = $1,600,000 - $400,000 = $1,200,000 If production increases by 20% (from 50,000 to 60,000 units), total variable costs will also increase by 20% from $1,200,000 to —_1.2($1,200,000) = $1,440,000 and total costs will increase from $1,600,000 to $400,000 + $1,440,000 = $1,840,000 Exercise 5.3, 1. Given: § = $30; VC = $10; FC = $100,000 per year a. TR= (S)X = $30X TC = (VO)X + FC = $10X + $100,000 To break even, TR=7C Then, $30X = $10X + $100,000 $20K = $100,000 X= $000 toys per year b. Break-even revenue = (S)'= $30(5000) = $150,000 per year ‘Chapter 5: Applications of Linear Equations 71Exercise 5.3 (continued) al Given: s = $3.20; VC = $1.20; FC = $250 per month a. FC= 12($250) = $3000 per year (S)X = $3.20 TC = (VO)X + FC = $1.20X + $3000 To break even, TR=TC Then, —-$3.20X= $1.20 + $3000 2.00% = $3000 = 1500 jars per year b. If Ingrid eells 3000 jars per year, NI = (S~ FO)X= FC = ($3.20 ~ $1.20)3000 - $3000 = $3000 TC = (VO)X * FC = $1.00X + $60,000 To breakeven, TR=7C Then, b. NI=(S-VOX-FC If.V7 = $7500 per month, then $7500 = ($2.50 - $1.00)x'~ $60,000 360,000 + $7500 i ‘$1.50 oon. = 10¢ per copy; FC = $300 per month; +, 35.00 | $100.00 , vo= 1.59 +o +a ag 1 0-5#= 5 per copy (S)X'= $0.10X (VOX + FC = $0.08X + $300 To break even, TR= TC Then, ——-$0.10X= $0.05Y + $300 $300 8000 copies per month b. f= 6000 + 1000 = 7000 copies per month. I= (S— VO)X— FC = ($0.10 — $0.05)7000 - $300 = $50 per month The additional 1000 copies add $50 per month profi. x= Given: Capacity = 250 units per week S= $20, VC = $12, FC= $1200 per week a. TR= (S)X= $20¥ TC = (VOX + FC = $12K + $1200 To break even, TR =7C Therefore, $20X = $12 + $1200 2X 150 units/week b NI=TR—TC = $20X- $12 - $1200 = $8X- $1200 () IEX= 120 unitsiweek, then N7= $8(120) - $1200 = -$240 There will be a Joss of S240/week. (i) 1250 unitsiweek, then 8(250) — $1200 = $800/\eek profit. 72 Business Mathematics in Canada, G/eExercise 5.3 (continued) 9. ¢. IfN/=$400/week, 1 11. Given: Total variable costs are Ra = joftotal revenue, FC = $10,000,000 per year ‘At full capacity, Sales revenue = see = $20,000,000 a. Atthe break-even point, TR-TC=0 That is, R- 3 7R- $10,000,000 = 0 TR = $10,000,000 TR = $16,000,000 $15,000000 =a Y= 75% of capacity 20000000 * *1°0% b. At 70% of capacity, 7R = 0.70($20,000,000) = $14,000,000 NI=TR—TC = $14,000,000 ~ + ($14,000,000) — $10,000,000 = -$666,667 That is, Beta would have a $666,667 loss. 13. Given: VC = $43, 5 = $70, FC = $648,000/year = $54,000/month Production capacity = 3200 composters per month a. TR= (S)X = $70X TC = (VO) + FC = $43X + $54,000 At break even, 7R = TC ‘S70X = $43X + $64,000 ‘$27 = $54,000 2000 composters /month b. NI= TRC = $T0X— $43X— $54,000 = $27 $54,000 500 composters/month, I= $27(2500) — $54,000 = $13,500/month c. At 50% capacity, X= 0.5(3200 composters/month) = 1600 composters/month and ‘NI = $27(1600) ~ $54,000 = -$10,800/month. Reflex will lose $10.800/month in the recession. d. For NI= $226,800/yea ‘$18,900 = $27 $64,000 $72,900 = $27X X= 2700 composters/month 2700 wich is 2299 « 100% = 84.4% of capacity. ich is 3200 00% e. If 7R=$71X while costs do not change, then $711 = $43X + $54,000 at the break-even point, $54,000 7 ‘The break-even volume decreases 71 composters/month for a $1 increase in the selling price. which is }929 compostersimonth ‘Chapter 5: Applications of Linear EquationsExercise 5.3 (continued) 18. Given: In the first quarter (21), 7R = $4,500,000; NI = $900,000; x= 60,000 tires. In the second quarter (Q2), NI = $700,000; = 50,000 tires. Since 7R = (9)x, then 5-78 $4:500.000 $75 per tire 60,000 ‘Also, TR= $75 x 50,000 = $3,750,000 in. Q2. then for Q1, oO and for Q2, 'S— VC)50,000 — FC @ Subtract: 7C)10,000 VC = S— $20 = $75 $20 = $55 per tire Substitute S— 7C = $20 into ® $700,000 = ($20)60,000 — Therefore, FC = $1,000,000 - $700,000 = $300,000 per quarter 17. Given: Annual sales = $1,200,000; FC = $400,000 per year Total variable costs = $600,000 a. Variable costs were one-half of sales revenue. At the break-even point, 0 = 7R-0.5(7R) ~ $400,000 a = $400099 _ $390,000 at breakeven b. Sales increase by 0.15($1,200,000) = $180,000 Since variable costs are 50% of total revenue, half of increased revenue will be consumed by variable costs and net income will increase by 0.50($180,000) = $90,000. c. Net income will increase by the full reduction in FC. That is, NZ will increase by 0.10($400,000) = $40,000. d. Net income will decrease by the full amount of the increase in total variable costs, That is, will decrease by 0.10(600,000) = $60,000. 19. Given: $= $135, YC = $110, FC = $700 for 16 to 36 participants a. To break even, $700 S-VE © $135—$110 b. Hx=36, then NI (S— VO)X- FC = ($135 — $110)36 — $700 = $200 ©. Ifa loss of $200 is incurred, $200 = ($135 - $110) x- $700 X= 20 Hence, the minimum number of participants is 20. 28 participants 74 Business Mathematics in Canada, 6/eExercise 5.3 (continued) 21. Given: If S = $23, FC = $2700, then 7C If 8 = $28, FC = $2700, then VC = $12 + 0.1($28) a. To break even, x= 2C $2700 S-VC $23-$14.30 Bi0tickets 208 tickets b. M=(S-VO)X-FC = (S-VOX-FC ($23 - §14.30)400 - $2700 ($28 - $14.80)300 - $2700 = $780 $1260 = $87.50, VC = $13.25, FC = $5600/month a. Last year's break-even volume = 23. Given: $5600 S-VC $37.50-$13.25 This year, VC = $15, FC = $6000/month. For the break-even volume to remain 231 griddles/month, 231 units/month FC S-¥C =—_——__ © * Break-even volume $6000 §-$15 = “2 = $25.97 - at S= $15 + $25.97 = $40.97 b. Last year’s NT=(S— VO)X— FC = ($37.50 - $13.25)300 — $5600 = $1675.00. In order that this year's profit also be $1675/month on sales of 300 griddles/month, ‘$1675 = 300(S— $15) - $6000 $7675 = 57875, g15 = S= 00 $15 = $40.58 25. Given: = $90/tonne, VC = $21 + $12 = $33 per tonne, FC = $200 + $300 + $225 = $725 per hectare a. To break even, = 1C_ . S725 12:72 tonnes per hectare S-¥C $90-$33 b. If S= $95 per tonne instead of $90 per tonne, $725 xP = 11.65 hectar as 9 tonnes per hectare ‘The break-even tonnage will be reduced by 1.03 tonnes per hectare. = (S- VOX FC = ($90 — $33)15 — $725 = $130 per hectare. ($90 — $33)10 — $725 = -$155.00 per hectare. ‘Chapter 5: Applications of Linear Equations 76Exercise 5.4 1. Given: 5 = $2.50 per diso; VC = $1.00 per dise; FC {60,000 per month. 160000 + TTC (8) ‘40000 Total 130000 Revenue, TR = $1.00X + $60,000 so 9999 20,000 | 60,000 410000 $50,000] $160,000 $80,000] $120,000 ‘00000 90000 a ad 80000 i asain 70000 60000 50000 20000 25000 30000 36000 40000 45000 50000 55000 60000 Discs per Month $5.00 , $100.00 800 I TRC ($) ae 750 Revenue, Zh 0.05% + $300 700 + (b) $50 profit 4000_[ 8000 a '$400_| $800 600 '$500_| $700 550 @, 8000 copiesimonth 500 b. $50 per month 450 400 4000 4500 5000 6600 6000 6500 7000 7500 8000 Copies per month 76 Business Mathematics in Canada, 6/eExercise 5.4 (continued) 5. Given: $= $20 per unit; YC = $12 per unit; FC = $1200 per week. TR-(9K 5000 mm,rC (S) (oye = $20 4500 Tal TC=(VOX+ FC YOR wn ee 3500 Reo] 250 7R: | $0 | $5000 3000 (by) rnc: | $1200 [ $4200 2500 a, 150 units/week 2000 b. (0 $240 loss 4500 i) $800 profit 1000 @ ©. 200 units/week 500 ° 0 25 50 75 100 125 150 175 200 225 250 Units per Week 7. Given: $= $70 per borgel; VC = $43 per borgel; FC = $648,000 per year = $54,000 per month. 230000 + TRTC($) Total (OX Revenue, $70X 210000 + TC =(VO)X+ FC 190000 $43X + $54,000 170000 (&) $13,500-L SE]_1000 [3200 150000 Total |7R: |$70,000|$224,000| Cost, TC |ZEz [$97,000]$191,600] iowa 110000 , 2000 borgetsimontiy cone i . $13,500/month : b ¥enonth 70000 eee SNe 6. $10,800/month Joss 1000 ©1500-2000 26003000 Borgels per Month Problem Effect of the ché yn the: number FC line Cline TR line Break-even point 8. No effect Slope increases No effect At higher volume 8 No effect, No effect, Slope increases At lower volume 10. Upward shift Upward shift No effect At higher volume Chapter 5: Applications of Linear Equations 7Concept Questions (Exercise 5.5) 1. a. Since CM = S— VC, CM will increase if Sis increased. b. Raw materials are part of VC. VC will decrease if the cost of raw materials decreases. Therefore, CM will increase. c. The property tax is part of FC. There will no change in CM. d. The salaries of executives are part of FC. There will no change in CM. e. Wages of production workers are part of VC. VC will increase and CM will decrease. 3. a, The break-even volume will be lowered since fewer unit reduced fixed costs. b. If unit variable costs (VC) increase, the contribution margin (CM = S— VC) decreases and more units must be sold to cover the unchanged fixed costs. Therefore, the break- even point is higher. c. No change—the actual sales volume does not affect the break-even point. d. If Sdecreases, the contribution margin (Ci = S— VC) decreases and more units must be sold to cover the unchanged fixed costs. Therefore, the break-even point is higher. @. Ifthe contribution rate (or ratio) CR increases, a larger portion of each unit's selling price is available to pay fixed costs. Therefore, the break-even point is lower need to be sold to cover the Exercise 5.5 4. Given: § = $30; VC = $10; FC = $100,000 per year a. Each toy sold contributes CM= S~ VC = $30 - $10 = $20 to the payment of fixed costs. To cover $100,000 of fixed costs (and break even), Toys-4-U needs to sell FC __ $100,000 per year FC__ $100,000 per year _ son toys nar year cM $20 S000 toys. b. Break-even revenue = 5000($30) = $1 a 3. Given: $= $3.20; VC = $1.20; FC = $250 per month a. FC= 12($250) = $3000 per year Each jar sold contributes CM= SVC = $3.20 - $1.20 = $2.00 to the payment of fixed costs. To cover $3000 of fixed costs (and break even), Ingrid must sell FC _ $3000 per year cM $2.00 anno am cere b. If Ingrid sells 3000 jars per year, this sales level is 1500 jars above break-even. Each of these jars contributes CM = $2.00 to profit Total profit = 1500($2.00) = $3000 2.60; VC = $1.00; FC = $60,000 per month VC = $2.50 ~ $1.00 = $1.50 per disc Break-even volume = “C = $60.000 ses per mont cM $1.50 b. For NI= $7500 per month, sales must be AL _ $7800 _5099 units above breakeven. ca” $1.50 Total sales must be 40,000 + 5000 = 45,000 discs per month 78 Business Mathematics in Canada, 6/eExercise 5.5 (continued) 10 per copy; FC = $300 per month; re =1.5¢ + $200, $10000 9 5¢ = 56 per copy 7. Given: 500 5000 a. CM=S~—VC= 10¢ - 5¢ = 5¢ per copy FC _ $300 7 jume = C= $300 Break-even volume = “= <> 5 = 8000 copies per month b. Each additional 1000 copies per month will add profit of 4000C.M = 1000($0.05) = $50 per month 9. Given: Capacity = 250 units per week $20, VC = $12, FC = $1200 per week 20 — $12 = $8.00 Break-even volume = £C. = $1200 —~ = 15Qunits perweek cM 8 b. () At30 units per week short of breakeven, there will be a loss of X(Ci4) = 30($8) = $240/week. At 100 units per week above breakeven, there will be a profit of 100($8) = $800/week. cc. For anet income of $400/week, sales must be NI _ $400 _ cM $8 Hence, sales must be 150 + 50 = 200 units per week. 41. a Contribution ate, cr ~ Total revenue ~ Total variable costs , 4990, Total revenue __. $18,000,000 - $6,000,000 50 units above breakeven ‘$18,000,000 ane =66.6% Break-even revenue = © - $10,000,000 _ 15,990,000 cR 0.66 If revenue of $18,000,000 represents 90% of capacity, then Reverve at full capacity = 120% x.§18,000,000= $20,000,000 $15,000,000 and break-even revenue represents e $20,000,000 x 100% = 25% of capacity b. At70% of capacity, Revenue = .70($20,000,000) = $14,000,000 $14,000,000 $14,000,000. $6,000,000 = $4,666,667 $18,000,000" pee Net income = $14,000,000 ~ $10,000,000 ~ $4,666,667 = —$656.657 That is, Beta would lose $666,667. and Total variable costs = Chapter 5: Applications of Linear Equations 73Exercise 5.5 (continued) 13, 16. Given: VC = $43, Production capacity 570, FC = $648, 000/year = $54,000/month ‘3200 composters per month a, CM=S—VC= $70 - $43 = §27 Break-even volume = 7 = $54.900 . 2099 compostersimonth cM” 827 b, At500 composters/month in excess of break even, ‘NI= 500(CM) = 500($27) = $13,500/month &. At50% of capacity, X'= 0.(3200 composters/month) = 1600 composters/month This is 400 composters/month below breakeven. Hence, Reflex will lose 400(827) = $10,800/month d. For NI= $226,800!year = $18,900/month, $18) mee = 2700 units/month $2; ‘ 2700 FITS 5 100% = 84.4% of canacity which is 3200 e. If Sis $1 higher while YC and FC are unchanged, then CM will increase by $1 to $28 and $54,000 _ ae 7 1928 That is, the break-even volume decreases by 71 composters /month for a $1 increase in the selling price. 000 + Break-even volume Given: In the first quarter (1), 7R = $4,500,000; NI = $900,000; X= 60,000 tires. In the second quarter (2), N7 = $700,000; = 50,000 tires. TR _ $4,500,000 _ Since 7R = ()X, then S="-=— 5 oog = Sznectice Also, TR = $75 x 50,000 = $3,750,000 in Q2. Since Nr then for Q1, (C§M)B0,000 - FC © andforQ2, $700,000 = (C450,000 — FC @ Subtract $200,000 = (Ci“)10,000 $200,000 _ CM =a 999 = $20-pertice Substitute CM = $20 into @: $700,000 = ($20)50,000 - Fc Therefore, FC = $1,000,000 ~ $700,000 = $300,000 per quarter Since cM=s—re then VC ~ 8 -CM= $75 - $20 = $55 per tire Business Mathematics in Canada, 6/eExercise 5.5 (continued) 17. 19. 21. Given: Annual sales = $1,200,000; FC = $400,000 per year Total variable costs = $600,000 a. Variable costs were one-half of sales revenue. At the break-even point, M=0=7R-TC TR —0.5(7R) ~ $400,000 TR sano900 = $800,000 at breakeven b. Sales increase by 0.1($1,200,000) = $180,000 Since variable costs are 50% of total revenue, half of increased revenue will be consumed by variable costs and et income will increase by 0.50($180,000) = $90,000. cc. Net income will increase by the full reduction in FC. That is, ‘NZ will increase by 0.10($400,000) = $40,000. d. Net income will decrease by the full amount of the increase in total variable costs, That is, .W will decrease by 0.10($600,000) = $60,000. Given: § = $135, YC = $110, FC = $700 for 15 to 36 participants a. CM=S-VC=$135- $110 = $25 To break even, x= = = 520° = 26 paticinants b. If.= 36 (which is 8 participants above breakeven), then —.NI= 8(C¥M) = 8($25) = $200 ©. Alloss of $200 will be incurred if there are zz ze = 8 fewer participants than breakeven Henee, the minimum number of participants is 28 ~ 8 = 20. Given: If § = $23, FC = $2700, then VC = $12 + 0.1($23) = $14.30 If'S = $28, FC= $2700, then VC = $12 + 0.1($28) = $14.80 S= $28 28 — $14.80 = $13.20 To break even, To break even, FC $2700 siosgugy, xe Fw S20 songs 205 cM $8.70 ~ CM $13.20 We have rounded up to get the smallest number of tickets that will make N7= 0 or a smal profit b. If 400 tickets are sold, If 300 tickets are sold, NI = $8.70(400 — 310.34) NI= $13,20(300 — 204.55) = $700 = 91260 Chapter 5: Applications of Linear Equations 81Exercise 6.5 (continued) 23. Given: = $37.60, VC = $13.2, FC = $5600/month a. Last year’s CM = S— VC = $37.50 ~ $13.25 = $24.25 Last year’s break-even volume = 2C = $8800 - 234 unitsimonth cM © $2425 This year, VC = $15, FC = $6000/month. For the break-even volume to still be 231 griddles/month, FC _ $6000 Break-evenvolume 231 SVC + CM= $18 + $26.97 = $40.97 D. Last year's NI = (CMPX— FC = ($24.25)300 ~ $5600 = $1675.00. In order that this year's profit also be $1675/month on sales of 300 griddles/month, ‘$1675 = 300CM - $6000 $7675 c= FO = $26.58 300 * and §=CM+ VC = $25.58 + $15 = $40.58 cM =. = $25.97 and 25. Given: $= $90/tonne, VC = $21 + $12 = $33 per tonne, FC = $200 + $300 + $225 = $725 per hectare a. CM=S~VC= $90— $33 = $67 per tonne FC _ $725pertonne Break-even yield = $< z weld Cal ~ $57 per tonne 12.72 tonnes/hectare b. If S= $95 per tonne, then CiM = $62 per tonne and Break-even yield = $725 perhectare 11 69 tonnesectare '$62per tonne The break-even yield is lowered by 12.72—11.60 = 1.03 tonnes/hectare @. (i) X= 15 tonnes/hectare (which is 2.28 tonnes/hectare above breakeven), NI = 2.28(CM) = 2.28 ($57) = $130 per hectare (iy If.= 10 tonnesihectare (which is 2.72 tonnes/hectare below breakeven). the loss will be 2.72(857) = $155 per hectare. 82 Business Mathematics in Canada, 6/0Review Problems = $180; VC = $110; FC= (x= $t80x TC = (VOW + FC = $110X + $1,260,000 To break even, TR = 7C Then, --$180X = $110x+ $1,260,000 ‘$70X = $1,260,000 X= 18,000 units Break-even sales revenue = (9)X= $180(18,000) = $3,240,000, If X= 20,000 units are sold, NI=(S—VO)X— FC (6180 ~ $110)20,000 - $1,260,000 = $140,000 ‘That is, the company will have a profit of $140,000. IFX= 17,500 units are sold, NI=(S— VO)X- FC ($180 — $110)17,500 - $1,260,000 = =$35,000 That is, the company will lose $35,000. 3. Given: FC = $45,000 + $7000 + $8000 = $60,000; VC = $8.00 + 0.08($35) = $10.80; 5 = $35.00 a. Break-even volume = —fC_ = __$60000 S=VC ~ $36.00 $10.80 NI= (8 VOX—RC = ($35.00 ~ $10.80)4800 ~ $60,000 = $85.160 Ifthe price is reduced 10%, ‘$= §35(1 ~ 0.10) = $31.60 and if sales are 15% higher, X= 4800(1 + 0.15) = 6520 units ‘Then N/= ($31.50 ~ $10.80)5520 ~ $60,000 = $54,264 ‘Select the $35 pricg because (forecast) net income will be larger (by almost $2000). d. If FC= $65,000 and VC = $17.80, then FC____$65000 S-Ve ~ $86.00-$11.80 That is, the break-even volume would be increased by 2802 ~ 2479 = 323 books $1,260,000 per year 2479 books 5. Given: N= $6 million on revenue of $135 million from X= 9000 cars; Break-even volume = 10,000 cars a. o At the break-even volume of = 10,000 cars, (0 = (S— VC)10,000— FC @ @-O gives: ‘$8,000,000 = (S- 7C)1000 Hence, S—¥C = $6000 Substitute this value into @ to obtain FC = $60 million per year b. Ifsales = 12,000 units (which are 2000 more than breakeven), NI= (S~ VC\X— FC = $8000(12,000) ~ $60 million = $12 million Chapter 5: Applications of Linear Equations 83Review Problems (continued) 7. Given: a. 9 100, FC = $200,000, VC = $60 Forecast = 8000 units (CM = S—VC= $100 ~ $60 = $40 FC _ $200,000 Break-even volume = => = “7 = 5000 units MD $100,000 = el +27 = 5000 + $100,000 Volume = Break-even volume + = 5000 a 7 2S00units If sales are 8000 - 5000 = 3000 units above breakeven, then NT= 3000(C¥) = 3000($40) = $120,000 (@ -NT=(CMMx- FC = 8000(CM) = FC For each $1 increase in FC, NI will drop $1 IF FC is 5% (or $10,000) higher, N7 will be $10,000 lower. (i) IEFCis 10% (or $20,000) lower, 7 will be $20,000 higher. (If Cis 10% (or $6) higher, then CM= S~ VC = $100 — $66 = $34, and NI= 8000(CM) — FC = 8000($34) — $200,000 = $72,000 That is, NZ will be $120,000 - $72,000 = $48,000 lower. (i) IVC is 5% (or $3) lower, then CM= $100 ~ $57 = $43 and NT = 8000($43) ~ $200,000 = $144,000 That is, 7 will be $144,000 — $120,001 Note the “leverage” effect here. That is, (% change in Ni) = () _If'Sis 5% (or $5) higher, then CM = $105 — $60 = $48, and ‘NI 8000(845) — $200,000 = $160,000 That is, NZ will be $160,000 — $120,000 = $40,000 higher. )) If Sis 10% (or $10) lower, then CM= $90 - $60 = $30 and ‘NI= 8000(830) — $200,000 = $40,000 That is, 7 will be $120,000 — $40,000 = $80,000 lower. Note the “leverage” effect here, That is, % change in NI= 6.6 x(% change in S) (assuming that the sales volume does not change). IF= 8000, VC = 1.1($60) = $66. $= $100, and $180,000, then 4(% change in VC) 84 Business Mathematics in Canada, 6/eSelf-Test Exercise 1 Given: S = $10 (= Average revenue per person)). Plan 1: ¥C= (0-1 + 0.3)S= $4, FC = $15,000 Plan (0.1 + 0.5)8 = $6, FC = $10,000 a. ——Plan2__ = SP-VC: S10 - $6 = $4 10, Break-even point 7 one = 2500 2 @ s00(s4)= 2000 “i ~300(84) = -$1200 {loss of $1200) c. Ifattendance surpasses the break-even point, the 30% commission rate generates the higher profit. However, if attendance falls short of the 2500 break-even point, the 30% commission will produce the larger loss. a. Contribution margin, CM = S- VC = $110 ~ $24 = $86 The number of room rentals per month needed to break even is 0 = 325.6 Full occupancy would be 30 x 30 = 900 rentals per month. Break-even occupancy rate = see x 100% = 26.2% b. (i) At40% occupancy, X= 0.4 x 900 = 360 rentals per month, NI = (CM)X— FC = ($86)360 — $28,000 = $2960/month (ii) At 30% occupancy, X= 0.3 x 900 = 270 rentals per month. NI = ($86)270 — $28,000 = -$4780 That is, @ loss of $4780 per month. c. In part b (i), we obtained a net income of $2960/month for a rental rate of $110 and a 40% occupancy. Ata rental rate of $94 per unit, Cl = $94 ~ $24 ‘At §0% occupancy, = 450 units/month and NI= (CM)X~ FC = ($70)450 ~ $28,000 = $3500/month ar shi to $94 per unit per night since the net income will Increase by $3500 — $2960 = $540 per month. 70 per unit Chapter 5: Applications of Linear Equations 8586 Business Mathematics in Canada, 6/e