Mathimathics for Management

CHAPTER ONE
1. Linear equations and their interpretative Application
1.1. Overview of linear equations and functions
In this particular chapter we are going to emphasize major features of linear equations and
inequalities, such as the slope of a straight line and its interpretation, intercepts, and equations of a
line. Besides this, solutions of systems of linear equations and inequalities are discussed. Business
applications of linear equations such as linear cost functions, linear revenue functions, and linear
profit functions are dealt with in our attempt to relate your knowledge of linear equations and
functions to the field of your study.
 Equation is a mathematical statement that says two algebraic expressions are equal. E.g. y =
2x + 3.
 It is convenient and concise way of representing relationship between quantities such as sales
and advertising, profit and time, cost and number of units manufactured, and so on.
 Algebraic expression is a mathematical statement indicating that numerical quantities are
linked by mathematical operations. E.g. x+2, 2x + y
In algebraic expressions a letter always stands for a number. Therefore, we add, subtract,
multiply, divide and perform other mathematical operations on a letter. In algebraic expression
value or variables separated by + or – signs. These values which are separated by + or – are called
Terms. Terms are often called monomials (mono = one). If an expression has more than one term,
it is called polynomials (poly = many). The letters in an algebraic expression are called variables/
unknowns.
 Linear Equations - are equations with a variable and a constant with degree one. Linear
equations are equations in which all variables are raised to the fist power and no cross product
of variables occurs.
 Are equations whose terms (the part separated by +, -, = signs) are a constant, or a constant
times one variable to the first power.
The standard form of a linear function is normally written as Y = mx + b.
Where, m = slope
 b = y-intercept.
The variable x is called an independent variable where as the variable, y, is known as the
dependent variable. The constant, b, measures the Y-axis intercept of the given straight line. The
coefficient of X namely ‘m’ is called the slope of the given straight line.
Linear equations are equations whose slope is constant throughout the line
 E.g. 2x - 3y = 7
 degree 1
 Constant 7

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 Terms 2x &3y separated by the minus sign

However, 2x + 3xy = 7 is not a linear equation; b/c 3xy is a constant times the product of two
y
variables. No X2 terms, no terms & no xy terms are allowed.
Why do we study linear equations?Here are some reasons for studying linear equations.
 We can represent /approximate many of the real world problems in linear equation.
 The analysis of linear mathematics is easier than that of nonlinear relations
 The techniques we use in the analysis of nonlinear relationship are the extension of those
used in linear relationship.
Illustration
Given the following linear equation:Determine any pair of values which satisfies the equation
1. Determine the value of y when x = 2
2. Determine the value of x when y = 0
Solution for the illustration question
1. Y = 5X + 3, if X = 2, then,
Y = 5(2) + 3
= 10 + 3
= 13
(2, 13)
2. When x = 0
Y = 5X + 3
= 5(0) + 3
=3
(0, 3)

When Y = 0, the truth set is

( −35 ,0)
Components of linear equations
Slopes
The slope of the line measures the change in the dependent variable, Y, due to change in the
independent variable, X. It indicates both steepness and direction of change.
Y = ax + b
a = slope
b = y-intercept

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Δy y 1− y 2 y 2− y1 rise
= = =
Δx x1 −x 2 x 2− x 1 run
Slope =
Generally, the slope of a line can be negative, positive, zero or undefined. The following
graphical presentations and detail explanation describe this phenomenon.
 Positively sloped lines: Shows that, there is a direct relationship between the dependent
and independent variable. Therefore, as X increases, Y also increases in the same fashion for a
decrease in X, Y also decreases.

Y - axis

Y= aX +b

X –axis

 Negatively sloped lines: Shows that, there is inverse relationship between the dependent
and independent variables. Hence, as X increases, Y decreases and as X decreases, Y
increases. The relationship between the variables can be depicted using graphical method as
follows:
Y-axis

Y = -ax + b

X -axis
 Zero slope:Shows that y is constant in spite of the value of X

Y- axis

Y=k

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X-axis
 Infinite/ undefined slope: Shows that the value of X remains constant regardless of the
change in the value of Y.
Y-axis

X=k X- axi
Self Test Questions
Find the slope of the line that passes through the following coordinate points and describe the
type of relationship that exists between the variables.
a. (2, 4) and (-3, 7)
b. (2, 5) and (4, 9)
c. (4, 8) and (3, 8)
d. (2, 6) and (2, 11)
Answers
a) y =26/5 – 3/5x, negative relationship
b) y = 2x + 1, positive relationship
c) y + 8, no relationship between x & y
d) x = 2 , undefined relationship

Intercepts
Intercepts are the points where the graph of the equation crosses the Y and the X axes. There are
two types of intercepts: X intercept and Y intercept. X intercept of the line is the point where the
graph crosses the x-axis where as the y intercept of the line is the point where thegraph crosses the
y-axis. For better understanding refer to the following graphical illustration.
Y- Intercept
(0, K)
X- Intercept
K, 0)
X axis
The X-intercept and Y-intercept can be obtained by assigning zero to any one of the variables at a
time and solve for the other.
Illustrations

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1. Given
6X + 3Y = 18
 Required
(1) Determine the X-intercept
(2) Determine the Y –intercept

Solution
3y+ 6x = 18
To get y - intercept, assign zero to x and solve for y.
x=0
Hence, 3y + 6(0) = 18
3Y = 18 (divide both sides by 3), results in Y = 6, hence, Y-intercept =(0, 6)
Likewise, putting Y = 0 results in
3(0) + 6X = 18
6X = 18, dividing both sides by 6 results in, X = 3, hence X- Intercept = (3, 0)
EQUATION OF A LINE
There are about three different situations under which we need to determine the equation of a line,
such as;
i) Given the slope and y-intercept
Equation of the line with slope, m and y - intercept (o, b) is given by y = mx + b
Where; - m is the slope of the line
b is the y- intercept
Illustration
The slope of aline that passes through (0,9) is 5.
What is the equation of a line?
Solution, we know that Y = mx + b
m=5
b=9

Hence y = 5x+9

ii) Given the slope and one point on the line, equation of the line can be determined as follows:

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y− y 1
x−x 1
m= = m(X-X1) = Y - Y1
Illustration
Given m= -5 and (X1, Y1) = (1, 25)
Required
Determine the equation of the
Solution m(X-X1) = Y - Y1
-5 (X-1) = Y-25
-5X + 5 = Y-25
Y = -5X + 5 + 25

Y = 5x + 30
iii) Given two points onthe line;
Equation of the line with two points given (X1, Y2) and (X2, Y2) can be determined as follows,
y 2− y 1 y− y 1 ( y− y1 )
= =m
x 2 −x 2 x−x 1 ( x−x 1 )
m= Then Then
To determine the equation of a straight line given two points on a line, we first compute the slope
of the line and then use point slope formula that is m(x-x1) = y-y1.
Illustration:
If (4, 1) &(6, 2) are two points on a given line, determine the equation.
2−1 1
x−1
6−4 2
m=
Y=
1
2
m=
1 4−1
=
2 x−4
4-X=2(4-1)
X-4 = 2Y-2
X-Y + 2 = 2Y
X-2 = 2Y

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Self check exercise

1. The slope of straight line is 2 and one point on the line is (5, 10), Determine the equation of
the line.
Answer:Y = 2X

2 Determine the equation of the line when

(a) The slope of the straight line is -5 and one point on the line is (2, 13)
Answer:Y=-5X + 23

(b) Two point on the line are ( 5,12 ) & (3,6)

Answer: Y = 3X -3
3. A manufacturer quotes a price of birr 15,000 for making 2000 chairs and birr 30,000 for making
5000 chairs. Assuming a linear relationship and that 4000 chairs are made. Find the equation
relating the total cost of making the chairs (TC), to the number of chairs made q.
Answer y = 5x +5000
4. As the number of units manufactured increases from100 to 200 units, manufacturing cost (total)
increases from birr 350 to birr 650. Assume that the given data establishes a linear relationship
between cost (y) and number of units made (x).
a. Determine the equation relating cost to number of units.
b. Determine the variable cost per unit
c. Suppose that 1000 units are manufactured, what is the cost of its production.
d. Given a selling price per unit of birr 5, what would breakeven quantity be?
e. If due to several constraints it is impossible to produce more than 15 units, should the operation
continue or shut down? Why or why not?
Answer
a) Y= 3x + 50
b) Variable cost per unit = birr 3
C) Cost = birr 3050
d) Break even quantity = 25 units
e) No, because total loss (birr 20) is less than total fixed cost (birr 50).
Applications of linear equations in business problems

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Having revised the basic concepts of linear equations, let us now see some application areas of
linear equations. Linear equations can be used to explain linear cost functions, linear revenue
functions, linear profit functions, and linear supply and demand functions.
1.6.1. Linear cost function
Cost of production refers to the total monetary expenditure made for the production of certain
level of outputs. Cost of production can be classified in to two: fixed and variable costs.
a. Fixed cost is the sum of all the costs that are independent of the level of production, namely rent,
insurance, depreciation and other overhead expenses, interest on loans, and upkeep of the
establishment which exist even while there is no production.
b. Variable cost is the sum of all costs that are dependent on the level of production namely
material costs, labour costs, cost of publicity and fuel etc. thus, total cost function is given by:
Total cost = Total Variable cost + Total Fixed cost
C(X) = V(X) + F(X)
Where,
C(X) = Total cost
Push V(X) = Total Variable cost
F(X) = Total Fixed cost
There are two assumptions that need to be made in conjunction with the creation and use of the
linear cost functions:
(1)Constant returns to scale
(2) Fixed cost of production remains constant for any levelof output.

Cost axis Total Cost Curve

Total Variable Cost

Total fixed Cost curve

Quantity axis

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C. Average costs - average costs are costs of production per unit. Generally, there are about
three different types of Average costs: Average total cost, Average fixed cost and Average
variable costs.
C( X )
Q
ATC = and since C(X) = V(X) + F(X)
V (X ) F(X )
+
Q Q
ATC=
Where; ATC= Average total cost
Q = level of production
V(X)
Q
= Average variable cost
F(X )
= Average Fixed cos t
Q
Let us see some characteristics of average costs.
i. Average Variable Cost remains constant over the whole range of output.
ii. Average Fixed Cost declines as output level increases
iii. Average Total Cost declines as Output level increases.
Cost

ATC

AVC

Quantity
Illustration

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Given cost function, Y =40X +50

Determine
A. Average Variable Cost
B. Average Fixed Cost For Q = 50, units and Q= 100 units
C. Average Total Cost
 When Q=50 when Q=100
TVC 40 ( 50 ) 40 X 100
=
Q 50 100
AVC =
= birr 40 = birr40

Look at the constancy of variable cost per unit regardless of the changes in the level of
production.
 When Q= 50 when Q= 100
50 50
=
50 100
AFC= birr 1 = = birr0.5
Compare the two average costs under the two levels of production. Have you detected that
average fixed cost declines as quantity rises? Nice.
 When Q= 50 when Q= 100
40 ( 50 ) 50 40 ( 100 ) 50
+ +
50 50 100 100
AC=
= birr 41 = birr 40.5
Dear trainees, have you seen the impact of change in quantity on the average total cost? In fact,
the impact is a decrease of average total cost as the level of output builds up.
Linear revenue functions
Revenue is the income we get from sale of a commodity. Manufacturers produce and sell
products at their respective prices in the market. Would you calculate the revenue earned by the
producer when the producer produces and sells from 0 - 10 units; if the product is sold at 10 birr
per unit? Excellent indeed! Since one unit of the product is sold at 10 birr, the producer gets zero
birr of revenue when it sells nothing, 10 birr when it produces and sells one unit, 20 birr when it
produces and sells 2 units, 30 birr when it produces and sells 3 units, and so. The detail for this
question can be presented as follows.

Units sold price per unit Revenue (selling price X units sold)
0 10 0

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1 10 10
2 10 20
3 10 30
4 10 40
5 10 50
6 10 60
7 10 70
8 10 80
9 10 90
10 10 100

I hope you have understood the relationship between revenue and quantity produced and sold. In
linear revenue function, Revenue is positively related to level of sales. When we use linear
revenue function to explain the relationship between revenue and sales volume we are making
one assumption: selling Price per unit remains constant. If selling price is variable, the equation
becomes nonlinear. Hence, we cannot explain it using linear equation concepts.

The relationship between the quantity produced and sold and revenue earned can be shown
mathematically using the following equation.
R=P.Q
Where, R = revenue
Q = units produced and sold
P is price per unit, is constant and is the slope of the equation.

Linear profit function

Revenue and cost functions lead to the profit function of the firm, as profit is the excess of
revenue over cost of production. The profit function of the firm takes the form:
( ¿ Q ) =R ( ¿ Q ) −C ( ¿ Q )
P
Where,R (Q) is the revenue generated from selling Q units and C (Q) is cost incurred for production
of Q units of product.

Companies either generate profit from their operation or incur a loss from their operation.
Do you know when companies make profit and when they suffer loss? Keeping this in view refer
to the following box to check your answer.

Conditions Operation result

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( Q ) >C (Q ) Profit (net gain)

R

( ¿ Q ) <C ( ¿ Q ) Loss
R

R (Q) = C (Q) No loss and no gain

Illustration
A&N Company produces and sales a commodity for birr 100. The company's cost function is
given by the equation (y) =50x+2,500, where x is units of products produced and sold and y is
total cost.
(a) Construct the profit function
(b) what profit is earned if the annual sale are 100 units

Solution
a) Profit = TR -TC
=100x-(50x +2,500)
=100x-50x-2,500
Profit =50x -2,500
b) To find the profit level when 100 units are produced and sold, substitute x = 100 units in the
profit function and solve for profit. Therefore, profit will be
Profit = 50 (100) -2,500
= birr 2,500

BREAKEVEN ANALYSIS FOR MANUFACTURING ENTERPRISES

Breakeven point is level of production or a level of sales at which the firm gains no profit and
suffers no loss. In another word, it is the point where total cost of production and total revenue
are equal. Knowing breakeven quantity helps firms to determine how many units they need to
produce and sell if they have to make profits. When an organization produces any quantity less
than the breakeven quantity, it suffers a loss, where as producing more than a breakeven quantity
yields a profit. The issue is therefore, how many units to produce to at least get the cost of
production back.
The following diagram shows the breakeven analysis in simple and understandable way.

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Cost axis
TR

Profit
TR = TC
LOSS

BEQ Quantity axis

Mathematically, breakeven point can be obtained as follows:

Literally, breakeven point is the level of production where total cost of production and total
revenue are equal
TC=TR (we can rewrite total cost as FC + VCQ and TR as PQ
Therefore,
PQ=FC+VCQ (collecting similar terms to one side yields)
PQ - VCQ =FC (Q is common for the left hand side, factor it out)
Q (P-VC) =FC (divide both sides by P – VC)
Where Q = implies breakeven point quantity
FC
P−VC
Q= Fc = fixed cost
P = price per unit
Vc= Variable cost per unit.

However, the objective of firms is not only to breakeven, they rather want to make profit of a
given amount. Wise managers should, therefore, know how many units to produce in order to get
a profit of say π amount, where π is the amount of profit. To find how many units to produce to
get a profit of π amount, we need to make minimum adjustment to our previous equation. The
modification needed is:

Π Π
TR-TC= Where is the desired profit Level.

Π
PQ-FC-VCQ=

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Π
PQ-VCQ=FC+

Π
Q (P-VC) =FC+

FC + Π
P−VC
Q=

Illustration
1. Sun Rise Company produces commodity y, for a variable cost per unit of birr 22.5 with fixed
cost of birr 250, 000. Commodity, y, is sold for birr 30,
(a) Determine the number of commodity y that must be produced by the company to breakeven.
(b) If sun Rise expects to sale 30,000 units the following year calculate the expected level of profit
(c) How many units should the company produce & sale to make a profit of 100,000 birr.

Solution
(a)Breakeven Quantity
FC 250 , 00
P−VC 30−22. 5
Q= = =33,333Units.

(b) Profit when the company produces and sells 30,000 units can be calculated by finding the profit
function and substituting level of production in the profit function.

Π =RT-TC
=30Q-(22.5Q+250,000)
=30Q–22.5 Q-250,000
=7.5Q-250,000
=7.5(30,000)-250,000
=225,000-250,000 = -25,000
Loss birr 25,000
(C) To make a profit of 100, 000 birr, the firm should produce:
FC + Π
P−VC
Q =

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30−22.5¿
250,000+100,000¿ ¿
=
¿
350 , 000
7 .5
=

= 46,667 Units

Illustration
2. Manufacturer of records has a fixed cost of birr 10,000 and variable cost per record made is
birr 5. Selling price is birr 10 per record.
(a) Write the revenue and cost equations.
(b) At what number of units will breakeven occur?
(c) At what sales volume (revenue) will breakeven occur?
Solution
a) TC = 5q + 10,000 - cost function
TR= 10q- revenue function
FC 10 , 000 10 , 000
P−VC 10−5 5
b) Q = = = = 2,000 Units
c) 10x2,000= birr 20,000 - breakeven sales volume.
Activity
A manufacturer of cassette tapes has a fixed cost of 60,000 and variable cost is 4 birr per
cassette produced. Selling price is 7 birr per cassette.
 write the revenue and cost equations
 At what number of units will breakeven occur?
 At what sales (revenue) volume will breakeven occur?
Draw the breakeven chart.

BREAKEVEN ANALYSIS FOR MERCHANDISING FIRMS

Merchandizing firms do have different type of cost called cost of retailing. Merchandizing firms
do not produce goods they sell; they rather buy it from others and resale it at a profit. Therefore,
the only variable costs of merchandizing firms are cost of retailing.
Assume a company that buys a merchandize at 180 birr and sells it at 200 birr. This implies that
if there is X birr revenue from sales of merchandize, (180/200) or 90 % of it is cost of goods sold

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and the remaining 10% is gross margin the company is earning. This means, from 1birr of sale
90 cents is cost of the goods sold and the remaining 10 cents is the profit margin added by the
company.

Grossprofit
sales
Margin =
20 R−C
=0 .1=
200 R
Margin = where R – is retail price
C- Purchase price
180
200
Cost of goods sold proportion = = 0.9 or 90%
purchase cos t
Re tail price
or 1- profit margin
Formula for computation of breakeven quantity for merchandizing firms is as follows: Y =
mx +b (merchandizing firm’s total cost function)
X- Represents merchandiser’s total revenue
At breakeven point cost = revenue
i.e. Y = X
we know that Y =mX + b
mX + b = X =at breakeven
if we let the breakeven dollar volume of sales to be equal to Xe
Xe=X hence,
Xe = X = mXe + b
Xe- m Xe=b
Xe (1-m) =b dividing both sides by (1-m), results in
b
1−m
Xe=
Fixed cost
=
1−vairalecos t/dollar of sales
Breakeven point
Illustration
1. If total cost, y, is related to sales volume, X, with equation Y= 0.32x + 23,800.

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a) Find variable cost on sales of birr 40,000

b) Find the break even dollar volume of sales
c) Find the net profit before tax on sales of $30,000
Solution
Variable cost = 0.32X
X = birr40, 000 hence,
TVC = 0.32(40,000)
= 12,800 birr
Fixed Cost
1 − variable Cost per dollar of sales
Break even dollar volume of sales =
23,800
1 − 0.32
=
23 , 800
0 .68
=
= 35,000 birr

2. Margin is to be 33%of retail price and other variable cost is estimated to be birr 0.13 per birr
of sales. Fixed cost is estimated to be birr 4.000
(a) What is the breakeven point?
(b) Estimate profit on salesof birr 50,000
Solution
FC
1−m
(a) Xe=
(1-0.33)=0.67
+ 0.13
Birr 0.8/birrof sale
4 ,000
=20 , 000
1−0 . 8
Xe = birr

(b)
Π
=50,000-
[ 0 . 8 ( 50 ,000 )+ 4 , 000 ]
=50,000-44,000
=6,000 birr

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1.9 LINEAR DEMAND AND SUPPLY ANALYSIS

In this particular section we introduce demand and supply analysis to you. Demand function
relates the quantity of products consumers are willing and able to buy to the unit price of the
product. Linear demand functions have negative slopes because demand decreases when price
increases.
A supply function, on the other hand, relates the quantity producers are willing and able to
supply to the unit selling price of the product. Linear supply functions have positive slope
because producers increase supply as price increases.

Consider the following demand and supply functions:

Demand: P = - 0.1q + 40
Supply: p= 0.2q + 10
Where; P is price per unit
q is number of units
The intersection of demand and supply functions results in market equilibrium, E. Market
equilibrium is the point where the quantity demanded is equal to quantity supplied. At
equilibrium point;
P = P -0.1q + 40 = 0.2q + 10
30 =0.3q (dividing both sides by 0.3)
q = 100
Taking one of the linear functions;
p = 0.2q + 10
p = 0.2(100) = birr 30
This implies that, market equilibrium occurs at the point where quantity is 100 units and price is
birr 30 per unit. The equilibrium price at which quantity demanded is equal to quantity supplied
(100 units) is birr 30,E(100, 30). The same can be plotted on a plane geometry as follows

SS curve = 0.2q + 10
Price
E(100, 20)
20

DD curve = -0.1q + 40
100quantities

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SUMMARY
For an equation to be linear sum conditions need to be fulfilled:
 All variables should be raised only to the first power.
 There should not be cross product of variables.
Linear equations have standard form of Y= ax + b, where, x is independent variable, y is
dependent variable, a is the slope of the linear equation and b is y intercept.
Slope is a measure of change in y due to a unit change in x and is denoted by a.
Intercepts are the points at which the graph of an equation cuts the y axis and the x axis. The
point where the graph of an equation crosses y axis is referred to as y intercept and the point
where the graph crosses the x axis x- intercept.
Given any one of the following situations one can determine the equation of a line using the
following formula.
i/ Slope and y-intercept
y = mx + b
ii/ Slope and one point on the line
m(x-x1) = y – y1
iii/ Two points on a given line; we first compute the slope(m) and then use point slope formula to
determine the equation.

Linear functions are always represented by a straight line and used to represent one to one simple
relationship.
Linear cost, revenue, profit, demand and supply functions can simply be analyzed based on
one’sown comprehension of linear function.
Breakeven point is the point where manufacturing and for mechanizing firms make zero profit.
That is, the total revenue is equal to the total cost, which yields zero profit.

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