Cost-Volume Relationships

Amount ($)

Fixed cost (FC)

0
Q (volume in units)
Cost-Volume Relationships

Amount ($)

0
Q (volume in units)
Cost-Volume Relationships

Amount ($)

Fixed cost (FC)

0
Q (volume in units)
Cost-Volume Relationships

Amount ($)

0
Q (volume in units)
Cost-Volume Relationships

Amount ($)

0 BEP units
Q (volume in units)
Break-Even Problem with Step Fixed
Costs

3 machines

2 machines

1 machine
Quantity

Step fixed costs and variable costs.

Break-Even Problem with Step Fixed
Costs

$
BEP
3
TC
BEP
2
TC
3
TC
2

1
Quantity
Multiple break-even points
 Costs

• Total cost = Variable cost + Fixed cost

C (q) = v q + F

• Marginal cost = Variable cost per unit, i.e., slope of

the total cost function

• Average cost = Total cost per unit,

= Total cost / no. of unit produced
 Problem set 1-4

If the total factory cost, y, of making x units of a

product is given by y = 3x + 20, and if 50 units are
made:
a) What is the total variable cost?
b) What is the total cost?
c) What is the variable cost per unit?
d) What is the average cost per unit?
e) what is the marginal cost per unit?
 Problem set 1-4

A printer quotes a price of $7,500 for printing 1,000

copies of a book and $15,000 for printing 2,500
copies. Assuming linear relationship and that 2,000
books are printed :
a) Find the equation relating the total cost, y, to
x, the number of books printed.
b) What is the total variable cost?
c) What is the total cost?
d) What is the variable cost per unit?
e) What is the average cost per unit?
f) what is the marginal cost of the last book
printed?
 Break –Even Point
Revenue = (Price per unit) (Number of unit sold)
i.e., R (q) = p q

Total cost = Variable cost + Fixed cost

C (q) = v q + F

Profit = Revenue – Cost

P(q) = R (q) – C(q) = p q – (v q + F)

At, break-even point, Revenue = Cost

 Break - Even Point

Break-Even quantity = F / (p – v)

Break-Even sales = F / (1 – m) ,
where, m = Total VC / Total Sales

Margin = Markup / Retail Price

= (Selling price per unit – average cost per unit) /
Selling price per unit
or, Margin = Revenue – Variable cost
 Cost-Volume Analysis

The owner of Old-Fashioned Berry Pies, S. Simon, is

contemplating adding a new line of pies, which will
require leasing new equipment for a monthly
payment of $6,000. Variable costs would be $2.00
per pie, and pies would retail for $7.00 each.
1. How many pies must be sold in order to break
even?
2. What would the profit (loss) be if 1,000 pies are
made and sold in a month?
3. How many pies must be sold to realize a profit of
$4,000?
4. If 2,000 pies can be sold, and a profit target is
$5,000, what price should be charged per pie?
 Cost-Volume Analysis
A manager has the option of purchasing one, two,
or three machines. Fixed cost and potential
volumes are as follows:
Number Total annual Corresponding
of Machines Fixed Cost Range of Output
1 $ 9,600 0 to 300
2. $ 15,000 301 to 600
3. $ 20,000 601 to 900
Variable cost is $10 per unit, and revenue is $40 per
unit.
A. Determine the break-even point for each range.
B. If projected annual demand is between 580 and
660 units, how many machines should the
manager purchase?
 Cost-Volume Analysis

A company operates on a margin of 33% of retail

and estimates other variable cost at $0.13 per dollar
of sales. Fixed expense is estimated at $4,000.

a) Find the revenue, cost, and profit function.

b) What would the profit if sales are $50,000 ?

c) What would the profit if sales are $15,000 ?

d) What is the break even sales volume?

 Cost-Volume Analysis
Let the sales are $s
Margin = $0.33 s
Variable Cost = $0.67 s
Other VC = $0.13 s
Total VC = $0.80 s

Therefore, Total Cost = VC + FC = $0.80 s + $4,000

a) R (s) = s, C(s) = 0.80 s + 4,000

b) P(s) = R (s) – C(s) = s - 0.80 s - 4,000 = 0.2s - 4000

Profit at sales $50,000 = 0.2 x 50000 - 4000
= $6000
c) Profit at sales $15,000 = 0.2 x 15000 - 4000 = - $1000

d) BEP = 4000/ (1 – 0.8) = $20000

Or, BEP = 4000/ (100-80) = 200 units
 Linear Demand Function

Demand functions express prices as a

function of quantity demanded.

D: P = -0.2q + 20

D’: P = -0.2q + 22

Vertical demand function, q = 10

Horizontal demand function, p = 5
 Systems of Linear equations

Often the variables encountered in a problem

may have to fulfill more than one condition. when
each of the conditions can be expressed in the
form of linear equations, the mathematical
description of the problem becomes a system of
linear equations.
Systems of Linear equations
y

x
Systems of Linear equations
y

x
Systems of Linear equations
y

x
Systems of Linear equations
y

x
Systems of Linear equations
y

x
 Systems of Linear equations

Operations on Linear System

A system of two equations: the first of which is the

line that passes through the points (2, 5) and (8,
3); the second line passes through the points (2, 5)
and (4, 2).

Elimination process

2x + 3y = 2, and 5x + 4y = 12
 Systems of Linear equations

Find the solution of the 3-by-3 system

x+y+z=4
2x – y +z = 3
x – 2y + 3z = 5

(1, 1, 2)
 Systems of Linear equations

Find the solution of the 2-by-2 system

2x + 5y = 15
3.2x + 8y = 24

(Non unique solution)

 Systems of Linear equations

Problem Set 2-1

14. Solve the system of equation:
2x - 5y + z = 7
- 3 x + y - 2z = -7
x + 2y + 3z = 14

(-2, -1, 6)
 Systems of Linear equations

Problem Set 2-2

1. If x liters of regular gasoline, which costs $0.50
per liter, are to be mixed with y liters of regular
unleaded gasoline, at $0.66 per liter, to obtain
1000 liters of mixture worth $0.60 per liter how
much of each gasoline should be used?

(625, 375)
 Systems of Linear equations

Problem Set 2-3

11. The demand and supply expressions for
products 1 and 2 are:
Demand Supply
p1 = 1000 – 5q1 – 4q2 p1 = 90 + 2q1 + 3q2
p2 = 900 – 2 q1 – 5q2 p2 = 120 + q1 + 4q2

(415, 65) ; (445, 65)