CHAPTER I: LINEAR EQUATIONS AND THEIR

INTERPRETIVE APPLICATIONS
 CHAPTER I: LINEAR EQUATIONS …contd

Objectives:
Up on the completion of this unit, you would be able to:
 Describe the algebraic and graphical characteristics of
linear equations.
 Identify the tools which help to determine the
equation which represents a linear relationship.
 Illustrate a variety of applications of linear equations. 

2
 Significance of linear mathematics

Linear mathematics is significant for a number

of reasons:
 First, many of the real world phenomenon, either are linear
or can be approximated reasonably well using linear
relationships (widely applicable).
 Second, the analysis of linear relationships is generally easier
than that of non-linear relationships.
 Lastly, the methods of analyzing non- linear relationships are
some times similar to, or extension of, those used in linear
mathematics.

3
 CHAPTER I: LINEAR EQUATIONS …contd

1.1 Linear Equations and their characteristics

Definition:
Linear equations are equations whose terms (the
parts separated by plus, minus, and equal signs) are
constant, or a constant times one variable to the first
power.
Example 1.1
2x - 3y = 7
2y - x = 4
x/2 + ¼ y = 4

4
1.1 Linear Equations and their characteristics …contd

Example 1.2
x2 +y +3x = 16
2x + 3xy = 7
√x+9 = y
Not in the forms of linear equations.

Generally, a linear equation involving two variables, x

and y has the standard form ax + by = C, where : a, b,
and c are real numbers a and b ≠ 0
5
 1.1 Linear Equations and their characteristics …contd

Linear equations involving “n” variables x1, x2, x3.... xn

has the general formula a1x1 +a2x2 +.....+ an xn = b,
where a1,a2.... an and b are real numbers and
a1,a2.... an  0
1.1.1 Solutions of Linear Equations
Given a linear equation having the form ax + by = c, the solution
set for the equation is the set of all order at pairs (x, y), which
satisfy the equation. Using set notation, the solution set S can
be specified as: S= {(x, y) / ax + by = C}

6
 1.1.1 Solutions of Linear Equations…. contd

Note: For any linear equation, S consists of an

infinite number of elements: That is, there is an
infinite number of pairs of values (x, y) which satisfy
a linear equation having the form ax + by = C.
Example 1.3
Consider a linear equation Y = 2x + 500. Determine:
i) the set of numbers which will satisfy the equation.
ii) the pair of values which satisfies the equation when x = 20.
iii) the pair of values which satisfies the equation when y = 0.

7
 1.1.1 Solutions of Linear Equations…. contd

Example 1.4
A company manufactures two different products. For
the coming week 120 hours of labor are available for
manufacturing two products. Work hours can be
allocated for production of either product. In
addition, since both products generate a good profit,
management is interested in using all 120 hours
during the week. Each unit produced of product A
requires 3 hours of labor and each unit of product B
requires 2.5 hours.
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 1.1.1 Solutions of Linear Equations…. contd

Required:
a) Define an equation which states that total work-
hours used for producing the two units?
b) How many units of product A can be produced if
30 units of B are produced?
c) If management decides to produce one product
only, what is the maximum quantity which can be
produced of product A?
 
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 1.1.2 Graphical Characteristics of Linear Equations

Graphing Two - Variable equations

A linear equation involving two variables graphs as a
straight line in two dimensions.
Steps to graph this type of linear equation:
i) identify and plot the coordinates of any two points
which are on the line.
ii) connect the two points with a straight line
iii) extend the straight line in both sides as desirable as
for your purpose
10
 1.1.2 Graphical Characteristics….contd

• Note: The coordinates of two points are found by

identifying any two members of the solution. The
easiest points to identify are those found by setting
one variable equal to zero and solving for the other
variable.
Example 1.5
Graph the equation 2x+4y = 16

11
 1.1.2 Graphical Characteristics….contd

Note: Any linear equation with two variables

having the form ax + by = 0 graphs as straight
line which passes through the origin. The
unique property of this equation is that the
right side, c equals zero.

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 1.1.3 Linear Functions

A linear function, f, involving one independent variable x

and a dependent variable y has the general form:
Y = f(x) = a1x + a0, where: a1 and a0 are constants, a1  0.
For a linear function having the form, f(x) = a1x + a0, a
change in the value of y is directly proportional to a
change in the value of x. This rate of change is
constant and represented by the slope a1.

13
 1.1.3 Linear Functions ...contd

Example 1.6
Imagine that you have taken a job as a sales person. Your
employer has stated that your salary will depend upon the number
of units you sell each week.
If we let y = weekly salary in birr
x = number of units sold each week
The dependency stated by your employer can be represented by the
equation.
Y = f(x), where f is the name of the salary function.
Suppose your employer has given you the following equation for
determining your weekly salary:

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 1.1.3 Linear Functions ...contd

Y = f(x) = 3x + 25
What will be your weekly salary if you sell 100 units? 75 units?
In the above example, the change in your weekly salary is
directly proportional to the change in the number of units
sold. That is, the slope 3 indicates the increase in weekly
salary associated with each additional unit sold.

15
 1.1.3 Linear Functions ...contd

a) Linear cost function

Organizations are concerned with costs, because they
reflect money flowing out of the organization. The out
flows usually could be pay for salaries, raw materials,
supplies, and so forth.

Therefore, the cost function, C(x) is defined by

Y=C(x) = mx +b, where m is variable cost per
unit, b is fixed cost and x is the volume of out put

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 1.1.3 Linear Functions ...contd

Total cost has two components: Total Variable cost and total fixed cost. These
two costs can be added to determine total cost. Therefore,
Total cost = Variable cost + Fixed cost
 Total variable costs vary with the level of out put and computed as the product
of variable cost per unit of out put and the level of out put. Hence,
Total variable cost (TVC) = Variable cost/unit x Units produced
TVC =Vc/Unit x Units produced.
 Total Fixed cost remains constant regardless of the change in the level of units
for certain predetermined level of out put

 
17
 1.1.3 Linear Functions ...contd

Example 1.8
The cost function,
C(x) = 0.4x + 18,000 had variable costs which vary
with the units produced and a fixed cost of 18,000.
Figure: Cost function

18
 1.1.3 Linear Functions ...contd

Example 1.9
A firm which produces a single product is interested
in determining the function that express annual total
cost y as a function of the number of units produced
x. Accountants indicate that fixed costs each year are
birr 50,000. They also have estimated that raw
material costs for each unit produced are Birr 5.5,
and labor costs per unit are Birr 1.50 in the assembly
department, Birr 0.75 in the finishing room, and Birr
1.25 in the packaging and shipping department.
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 1.1.3 Linear Functions ...contd

Required:
a) Determine the variable cost per unit and cost
function
b) What will be the total variable cost if 20,000 units
are produce?
c) What is the marginal cost?
d) What will be the total cost if 10,000 units are
produced?
 
20
 1.1.3 Linear Functions ...contd

b) Linear revenue function

The money which flows in to an organization from
either selling products or providing services is often
referred to as revenue and is given by:
Total Revenue = (Price) (Quantity sold or service
rendered)
The function R(x) = mx, where m is the rate of selling
price per unit item and x is the total volume of out
put, is called the Revenue function.

21
 1.1.3 Linear Functions ...contd

 An assumption in this relationship is that the selling price

is the same for all units sold. Assume a firm sells n
products. .

 If xi equals the number of units sold of product i and pi

equals the price of product i, the function which allows you
to compute total revenue from the sale of n products is:
R = p1 x1 + p2 x2 + ......pnxn
  
 

22
 1.1.3 Linear Functions ...contd

Example 1.10
Assume a firm sells three products x1, x2 and x3. If it
sells 20 units of x1, 15 units of x2 and 25 units of x3 at
a price of Birr 100, 125 and 350 respectively,
a) What will be the total revenue?
b) If price of x2 is increased by 20% and the values of
other variables remain constant, what will be the
new total revenue?

23
 1.1.3 Linear Functions ...contd

Exercise
What will be the new total revenue if the price of x1is
reduced by 10% and the number of units of x3 sold is
increased by 5% where price of x2 remains constant?
c) Linear profit function
Profit is the difference between total revenue and
total cost, stated in equation form:
Profit = Total Revenue - Total Cost

24
 1.1.3 Linear Functions ...contd

If total revenue = R(x) and

Total cost = C(x), where x equals quantity produced
and sold, then profit is defined as:  
P(x) = R(x) - C (x) and there are three conditions:
i) Total revenue exceeds total cost; i.e. profit is positive
and is referred to as net gain, or net profit i.e,
R(x) > C (x)
ii)Total cost exceeds total revenue, profit is negative,
and is referred to as a net loss or deficit i.e C(x) > R(x)

25
 1.1.3 Linear Functions ...contd

iii) Total cost equals total revenue, i.e. no profit, no

loss i.e. C(x) = R(x)

Example 1.11
A firm sells a single product for Birr 65 per unit. Variable costs
per unit are Birr 20 for materials and Birr 27.50 for labor.
Annual fixed costs are Birr 100,000.
i) Construct the profit function stated in terms of x.
ii) What profit is earned if annual sales are 20,000?
iii) What is marginal profit of 20th unit?

26
 1.1.4 Slope of Linear Equations

 Slope of straight line or line segment is defined as the

ratio of rise or fall to the run between two points on the
line, where rise or fall is a vertical separation and run is a
horizontal separation of two points.
 It refers to the inclination of a line, and the rate at
which the line rises or falls (how steep the line is).
The graph of ax + by = c is a straight line and the slope of the line
through two points (x1,y1) and (x2, y2) is given by:
Slope = m = y2-y1, x2  x1.
x2-x1
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 1.1.4 Slope of Linear Equations…contd

Hence, Slope = Rise(Fall) = Difference of y's = y2 - y1

Run Difference of x's x2 - x1
 The slope of a line may be positive, negative, zero, or
undefined.
 Positive Slope - A line with a positive slope rises from left to
right, or runs up hill. For such a line the value of y increases as x
increases (conversely, y decreases as x decreases).
 Negative Slope- A line having a negative slope falls from left to
right, or runs down hill. For such a line the value of y decreases
as x increases (or conversely, y increases as x decreases), hence,
x and y be have in an inverse manner.

28
 1.1.4 Slope of Linear Equations…contd

 Zero Slope - A line having a zero slope is horizontal (has a

form of y = k). As x increases or decreases y stays constant.
This is the case where the value of y is the same in pairs of
values.
 Undefined Slope- Vertical lines (or the form x = k) have a
slope which is undefined. Since x is constant, we cannot
observe the behavior of y as x changes.
Example 1.12
Find the slope of the line through the pair of points
(-1, 4) and (1, 8).
Example 1.13
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 Applications of slope

In applications, the slope of a line segment often is

interpreted as the amount of change in the vertical
for a unit change (that is, a change of one) in the
horizontal.
Example 1.14
Assume that coordinates are in order of :
(Disposable income, Consumption expenditures)
(312, 295) and (575, 537)

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 Applications of slope

Example 1.15
It costs Birr 2500 to set up the presses and machinery needed
to print and bind a paper back book. After set up, it costs Birr
2 per book printed and bound. Let x represent the number of
books made and y the total cost of making this number of
books.
a) Write the equation for y in terms of x.
b) State the slope of the line and interpret this number.
c) State the y - intercept of the line and interpret this number.
d) What is the total cost if 100 books are made?

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 1.1.5 Forms of Linear Equations

Generally, there are three forms of linear equations which are

considered as important tools in linear mathematical models:
slope-intercept form, point - slope form and two - points form.
a) Slope - Intercept Form
If the equation of a line is written in the form of y = mx + b, it is
called slope - intercept form, where b is y intercept and m is
the slope of a line.
Example 1.17
Write equation of a line with slope of 2 and y intercept of 5.
b) Point - Slope Form

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 1.1.5 Forms of Linear Equations

 To develop a point-slope form of linear equation,

slope and coordinate of a point on the line should be
known.
Example 1.18
If a straight line passes through points (1/2, 5) with
the slope of 4, what will be the equation of the line?
c) Two points form
 The slope m of the straight line connecting two
points (x1, y1) and (x2, y2) is

33
 1.1.5 Forms of Linear Equations

m = y = y2 - y1
x x2-x1
When this is expanded, it takes a form of:
y - y 1 = y2 - y 1
X -X1 X2 - X1 and is called two - point slope form of

linear equations.
Example 1.19
What will be equation of a line that passes through
points (2, 4) and (5, 12)?
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 1.2 Break Even Analysis

1.2.1 Break Even Analysis for Manufacturing Firms

Break Even Analysis is defined as a technique for studying the
relationship between cost, volume and profit and enables to
understand the impact of changes in the level of out put on
cost and profit. Hence, it is called C-V-P Analysis and Break
even analysis.
Break even analysis focuses up on the profitability of a firm. Of
specific concern in breakeven analysis is identifying the level of
operation or level of out put that would result in a zero profit.
This level of operation or out put is called break even point.
 

35
 1.2 Break Even Analysis….contd

Generally, some of the significances of Break Even

Analysis include:
– BEA as a model is valuable particularly as a planning tool
when firms are contemplating expansions such as offering
new products or services.
– BEA is important in evaluating the pros and cons of a
beginning business by enabling to determine the level of
out put which will be profitable or leads to loss. In each
instance, the analysis allows for a projection of
profitability.

36
 1.2 Break Even Analysis….contd

Important Assumptions:
• Both total revenue and total cost function are linear.
• Total variable costs change directly and
proportionately with the volume of out put. But,
variable costs per unit are constant or assumed to be
constant regardless of the level of out put.
• Fixed costs remain unchanged irrespective of the
determined level of out put (at least in the short
term).

37
 1.2 Break Even Analysis….contd

• Selling price per unit is constant. Where the selling

price is not constant, average price is sometimes
chosen for purposes of conducting the analysis.

• Price per unit is greater than variable cost per unit. If

price per unit is less than the cost per unit, a firm will
lose money on every unit produced and sold. Break
even conditions never exist.

38
 1.2 Break Even Analysis….contd

Example 1.20
A manufacturer of records has a fixed cost of 10,000
birr and variable cost per record made is 5 birr.
Selling price per unit is 10 birr.
a) Write the revenue, cost, and profit equations.
b) At what volume of units will breakeven occur?
c) At what sales volume (revenue) will breakeven

occur?
39
 1.2 Break Even Analysis….contd

Exercise
A manufacturer of cassette tapes has a fixed cost of
60000 birr and variable cost is 4 birr per cassette
produced. Selling price is 7 birr per cassette.
a) Write the revenue, cost, and profit equations.
b) At what number of units will breakeven occur?
c) At what sales volume(revenue) will breakeven
occur?

40
 1.2 Break Even Analysis….contd

 1.2.2 Break Even Analysis for Merchandizing Firms

There are firms which do not produce products by
themselves; but purchase from other organizations
and hold for some time and sell it to others at a price
that is above the cost.
 For those firms that purchase products and sell them
at a price that is presumably above the cost, the
break even analysis is treated differently.

41
 1.2 Break Even Analysis….contd

Example 1.22
Suppose, the cost of an item is Birr 130 and priced to
be sold at Birr 200. If selling expense is 10%, and FC
is Birr 12,000, what will be the total cost function? At
what level of sales that the company break-even?

Margin = Mark-up/Retail price

Mark-up = Retail Price – Cost

42
 1.2 Break Even Analysis….contd

 Generally, if the relationship between cost

and sales is written in the general slope
intercept form, y =mx+b, Where y is total cost
x is total sales volume in Birr,&
m- variable cost/birr of sales (slope).

43
 1.2 Break Even Analysis….contd

Example 1.23
Top management has set a sales goal of birr 200,000.
Margin is to be 45% of retail price and other variable
cost is estimated at birr 0.05 per birr of sales. Fixed
cost is projected at birr 56000.
a) Find the linear cost-sales model.
b) What is the break-even level of sales?

44
 1.2 Break Even Analysis….contd

Example 1.24
A company expects fixed cost of birr 36,000. Cost of
goods sold is 48% of retail and it incurs other variable
cost of birr 0.07 per birr of sales.
a) What will be the breakeven sales volume (revenue)?
b) What will net profit before taxes be on sales of
75000 birr?
c) If you want to make profit before taxes of 99,000
birr, what should be the sales volume?

45