Function applications

Revenue, cost and linear profit

linear
Fixed cost: it is the sum of all costs that are independent of the level of
production, such as rent, insurance, etc. This cost must be paid regardless of
whether the factory produces or not.

Variable cost: it is the sum of all costs dependent on the level of production, such
as labor and materials.

Total cost: it is the sum of variable and fixed costs

total cost = variable cost + fixed cost

Total income (R): is the money that a manufacturer receives from the sale of its
production

total revenue= (price per unit)(number of units sold)

Profit: is the total revenue minus the total cost

Income Example
The total monthly income of a daycare center obtained from caring for x children is given by
R=450x, obtain the expression in function form, make a table of the possible values and
graph.

F(x)=450x, where x is the number of children cared for

GRAPH AND TABLE OF VALUES

INCOME

INCOME
 A small business predicts that its income will grow according to the straight line
method with a slope of $50,000 per year. In its fifth year, the business had
revenues of $330,000.
◦ Determine an equation that describes the relationship between revenue, R, and
the number of years, T, since the business opened.

Solution

R ( x ) = ax + b
R (5) = 50,000(5) + b

R (5) = 330,000 330,000 = 50,000(5) + bb = 330,000 — 250,000 b

= 80,000
incom
e

□
income
Cost Example

The total cost of a company to produce and sell x products in a

week is given by the equation: C(x) = 60(x)+300.

►This equation tells us that for each unit produced and sold it
has a cost of 60 and
►It also tells us that there is a fixed cost of production and
sale, such as the payment of workers, the rent of the
industrial warehouse, electricity, water, telephone, etc., this
cost must be paid regardless of whether the product is sold or
not. product
cost

□ cost
Anderson Company manufactures a product for which the variable cost per unit is
$6 and the fixed cost is $80,000. Each unit retails for $10.
A) Determine the number of units that must be sold to obtain a profit of $60,000.
B) What is the utility equation?
C) Check the equation…
D) Find the balance point

Solution: let q be the number of units that must be sold (in many business
problems q represents quantity).
So:
total cost = variable cost + fixed cost
total cost = 6q + 80,000

Total revenue = (price per unit)(number of units sold)

a) Determine the number
Utility example
Breakeven point
of units for a profit of 60,000
graph

► Since:
Profit400000
= total income – total cost
350000
300000
60,000 = 10q-(6q+80,000)
250000
60,000=
20000010q – 6q – 80000 cost
60,000=
1500004q – 80,000 (eq. From utility) incom
60,000+80,000=
100000 4q e profit
140,000=4q
50000 0

140,000/-50000 4 =q

Solving we have that q=35,000

Therefore,-100000
35,000 units
10000must be sold20000
15000 to make25000
a profit30000
of $60,000.
35000

cost 140000 170000 200000 230000 260000 290000

income q=
100000 35,000
150000 200000 250000 300000 350000
c).- utility 60,000 = 4(35,000)
-40000 -20000 - 80,000
0 20000 40000 60000
Utility check
60,000 = 140,000 - 80,000
0,000 = 60,000
Exercise ()

A corn refining company produces gluten for livestock feed, at a

variable cost of $82 per ton. If fixed costs are $120,000 per
month and feed sells for $134 per ton.
a) .- How many tons must be sold per month for the company to
obtain a monthly profit of 560,000?

b) .- prepare the graph

c) .- do the check
► Breakeven point analysis focuses on the
profitability of a company.
► In breakeven analysis, a major concern is the level
of operation or the level of production that would
result in zero profit.
► This level of operations or production is
called the equilibrium point.
It represents the level of operation at which total
►
revenue equals total cost.
Any change to this
►
operating level will result
in a profit or loss.
o A group of engineers are interested in forming a company to
produce smoke detectors. They have developed a design and
estimate that the variable costs per unit, including materials,
labor, and marketing costs, are $22.50. The fixed costs
associated with the formation, operation and administration
of the company and the purchase of equipment and
machinery total $250,000. They estimate that the selling
price will be $30 per detector.
•beA)soldDetermine the number of smoke detectors that must
for the company to break even on the project.

• B) Preliminary marketing data indicate that the

The company can expect to sell approximately 30,000
detectors over the life of the project if the detectors sell for
$30 per unit. Determine the expected profits at this level
of production.
• If x is the number of smoke detectors produced
and sold, the total income function is represented
by the equation ◦ R(x) = 30x
► The total cost function is represented by the
equation
◦ C(x) = 22.5x+250000

► The equilibrium point condition is

◦ R(x)=C(x)

Approach
► For this problem, the
equilibrium point is calculated as

30x = 22.5x + 250000

7.5 x _ 250000
x = 33333.33
BE
It consists of first writing the utility function and setting it equal to 0, as follows

P(x)=R( x ) —C ( x )
P ( x ) = 30 x— (22.5 x + 250000)
P ( x ) = 7.5 x — 250000

By setting the utility function P equal to 0, we have:

7.5 x — 250000 = 0
7.5x = 250000
= 33333.33
 b) With projected sales of 30,000

— 250000
P (30000) = 7.5(30000)

P (30000) = 225000 — 250000

P (30000) = —25000

This suggests that if all estimates (price, cost, and demand) prove true, the
company can expect to lose $25,000 on the project.
additional

► Verify that total revenue and

total costs both equal
$1,000,000 (taking into account
rounding) at the break-even
point
Cost

■Utility
Linear supply and demand

► A demand function is a mathematical

relationship that expresses how the quantity
demanded of an item varies with the price
charged for it. The demand function for a
particular product is:
q d = number of units demanded p =
price

► The relationship between these two variables

is usually inverse, that is, an increase in price
decreases demand and vice versa.
 Suppose the weekly demand function for large
pizzas at a pizzeria is:
p ( q ) = 26 -q

40

► A. If the current price is $18.50 per pizza. How

many pizzas are sold per week?
► b. If 200 pizzas are sold each week, what is
the current price?
c. If the owner wants to double the number of
large pizzas sold per week, what should their
price be?

►
solution a ) P ( q ) = 18-5
18.5 = 26 - d
40
q = 300
b ) q = 200
c)q=
p (200) = 26 -
400 400
200 p (400) = 26 -
40
= 16
p (200) = 21
40
 Price
30

-♦-Price

100 200 300 400 500

o Relates the market price to the quantities that suppliers
are willing to produce and sell. Supply functions imply that
what is put on the market depends on the price that
people are willing to pay.
o In contrast to the inverse nature of price and quantity
demanded, the quantity that suppliers are willing to supply
varies directly with the market price.
o With all other factors equal, the higher the price in the
market, the more a supplier will want to produce and sell;
The lower the price that people are willing to pay, the
lower the incentive to produce and sell.
o Quantity supplied=f(market price)
Offer program
►The following table is an offer schedule. It gives a correspondence
between the price p of a certain product and the quantity q that
manufacturers provide per week at that price. Each price
corresponds to exactly one quantity and vice versa.

►If p is the independent variable, then q is a function of p, say

q=f(p), yf(500)=11, f(600)=14, f(700)=17, and f(800)=20 .
◦ Note that when the price per unit increases, manufacturers are
willing to supply more units per week.
► On the other hand, if q is the independent variable, then p is a
function of q, say p=g(q), yg(11)=500, g(14)=600, g(17)=700 and
g( 20)=800

Price per Quantity demanded

unit, p per week, q

$500 11

$600 14

$700 17

$800 20
 linear market equilibrium point

Suppose that for a product z the demand

equation is: p = - 1q + 12
180
And the supply equation is:
where
Price q, p >=0. Demand Offer
0 12 8
500 9.2222222 9.6666667
1000 6.4444444 11.333333
1500 3.6666667 13
2000 0.8888889 14.666667
p = ~~q + 8
► 300
Breakeven
► The equilibrium price is the
price at which consumers will
buy the same quantity of a
product that producers offer at
that price. In summary, n is the
price at which there is stability
between producer and
consumer. The quantity m is
called the equilibrium quantity
Breakeven
Determine the equilibrium point
algebraically
• To accurately determine the equilibrium point, we
solve the system formed by the supply and
demand equations. Let's do this for the above data
q+
180 12
1
300

• Equating supply and demand, we obtain

1 1
q+8 q+
= 180 12
 solving
(1
p (450) = 1 (450) +8
1
v Therefore
300 180
q = 450
, 300
p (450) = 9.50

And the break-even point is (450, 9.5). Therefore, at a price of $9.50

per unit, manufacturers would produce exactly the number (450) units
per week that consumers would purchase at that price.
Breakeven
a) with tax

► If the manufacturer is charged a

tax of $1.5 per unit, how would
the original equilibrium price be
affected if demand remains the
same?
1 1
q + 8 + 1.5 = — q + 12
300 180
 (281.25)
+ 9.5

1 1 1
q+ q+ p (281.25) =
300 9.5 180 12 300
 p (281.25) = 10.4375

1
q + 9.5 q+
300 180 12
q = 281.25
Tax librium point
◦ b. Determine the total income earned by the manufacturer at
the break-even point before and after tax.
◦ Solution: if q units of a product are sold at a price of p
each, then the total income is given by:
◦ R(q)=qp
◦ R(450)=450*9.5=4275
◦ And after tax:
◦ R(q)=qp
◦ R(281.25)=281.25*10.4375=2935.51875

► Which is a decrease.
2.3.4 b) with subsidy

► If the local government gives

the manufacturer a subsidy of
$1.5 per unit, how would the
original equilibrium price be
affected if demand remains the
same?
1
q + 8 1.5 =
1q
300 180 + 12
 q + 6.5 q+ 1
= 180 12 300
gg
Yo 1
- - - -q + 6.5 = q +
1
12,300 180
(1/300 + 1/180) q = 5.5
q = 618.75
300
p (618.75) = (618.75) + 6.5

p (618.75) = 8.5625
 Point of
balance with
taxes
18

16 p = ~~q +
8 300

Demand
of Balance

10 Offer
(450, 9.5) Breakeven Point

(618.75, 8.5625) Breakeven Point 1 fair

12 with taxes Offer with

p =-----
180 subsidy

1000 1500 2000

◦ b. Determine the total income
earned by the manufacturer at
the break-even point before
and after the subsidy.
◦ Solution: if q units of a product are sold at a
price of p each, then the total income is given
by:
◦ R(q)=qp
◦ R(450)=450*9.5=4275, without subsidy
◦ And with subsidy:
◦ R(q)=qp
◦ R(618.75)=618.75*8.5625=5298.046875
► Which is an increase.