CHAPTER ONE

Linear Equations and their Interpretative

Application
1.1 Linear Equations, Functions and Graphs

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

Chapter One, Linear Equations and Their Applications Page 1

 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
 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 variables. No X 2 terms, no
y
terms & no xy terms are allowed.
Example: 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 = 13
= 10 + 3 (2, 13)
2. When x = 0

Chapter One, Linear Equations and Their Applications Page 2

 Y = 5X + 3 =3
= 5(0) + 3 (0, 3)

When Y = 0, the truth set is

( −3
5
,0 )
Components of linear equations
1. 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

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

Chapter One, Linear Equations and Their Applications Page 3

 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

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
2. Intercepts
Intercepts are the points where the graph of the equation
crosses the Y and the X axes. There are two types of

Chapter One, Linear Equations and Their Applications Page 4

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 the graph 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.
Example: 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

Chapter One, Linear Equations and Their Applications Page 5

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 three different situations under which we need to
determine the equation of a lines:
1. 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
Example: The slope of a line 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

2. Given the slope and one point on the line, equation of the
line can be determined as follows:
y− y 1
x−x 1
m= = m(X-X1) = Y - Y1
Example: 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 + 5Y+ 25+ 30
= 5x

Chapter One, Linear Equations and Their Applications Page 6

 3. Given two points on the line;
Equation of the line with two points given (X 1, Y2) and (X2, Y2)
y 2− y 1 y− y 1
=
x 2 −x 2 x−x 1
can be determined as follows, m= Then Then
( y− y1 )
=m
( x−x 1 )

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.
Example: If (4, 1) & (6, 2) are two points on a given line,
determine the equation.
2−1 X-4=2(y-1)
6−4
m= X-4 = 2Y-2
1 X-4 + 2 = 2Y
2
m= X-2 = 2Y
1 y −1 1
= x−1
2 x−4 2
Y=
1.2 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
1.3 Applications of Linear Equations in
Business Problems

Chapter One, Linear Equations and Their Applications Page 7

(Linear Cost Output Relationship, Variable Cost, Fixed
Cost, Total Cost, Average Cost, Total cost, Total
Revenue, and Total Profit)
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. 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, labor 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
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
Chapter One, Linear Equations and Their Applications Page 8
(2) Fixed cost of production remains constant for any level of
output.
Cost axis Total Cost Curve
Total Variable Cost

Total fixed
Cost curve

Quant
ity axis
Activity
1. An agency rents cars for one day and charges 22 birr plus
20 cents per kilo Meter the car is driven.
a. Write the equation for one day’s rental, y, in terms
of x, the number of Kilo Meters driven
b. Interpret the slope and the y- intercept
c. What is the renter’s cost per mile if a car is driven
100-kilo meters? 200 Kilo Meters.
2. A publisher asks a printer for quotations on the cost of
printing 1000 and 2000 copies of books. The printer
quotes 4500 birr for 1000 copies and 7500 birr for 2000
copies. Assume that cost, y, is linearly related to x, the
number of books printed.
a. write the coordinates of the given points
b. write the equation of the line
3. If the relationship between total cost and number of units
made is linear and if cost increases by 3 birr for each
additional unit made, and if the total cost of 10 units is 40
birr find the equation of the relationship between total
cost (y) and number of units X
Chapter One, Linear Equations and Their Applications Page 9
2. 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. 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.
3. 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

Chapter One, Linear Equations and Their Applications Page 10

 ( 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
1.4 BREAKEVEN ANALYSIS
1.4.1 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

Chapter One, Linear Equations and Their Applications Page 11

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.
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

Chapter One, Linear Equations and Their Applications Page 12

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

PQ-FC-VCQ= Π FC + Π
P−VC
PQ-VCQ=FC+ Π Q=

Q (P-VC) =FC+ Π
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,
2. Determine the number of commodity y that must be
produced by the company to breakeven.
3. If sun Rise expects to sale 30,000 units the following year
calculate the expected level of profit
4. 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.

Chapter One, Linear Equations and Their Applications Page 13

 (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 =

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

Chapter One, Linear Equations and Their Applications Page 14

 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.
1.4.2 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 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

Chapter One, Linear Equations and Their Applications Page 15

 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 X e = 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.
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

Chapter One, Linear Equations and Their Applications Page 16

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 23 , 800 = 35,000 birr
1 − 0.32 0 .68
=
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 sales of birr 50,000
Solution
FC
1−m
(a) Xe=
(1-0.33) = 0.67
+ 0.13
Birr 0.8/birr of 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
Activity

Chapter One, Linear Equations and Their Applications Page 17

A company expects fixed cost of birr 36,000. Margin is to be
0.52 of retail and variable cost in addition to cost of goods sold
is estimated to be birr 0.07 per birr of sale
a. Find the Breakeven point.
b. write the equation relating sales and cost
c. What will net profit before tax be on sales of birr
75 ,000
Solution
FC
1−m
a) Xe =
Variable cost per birr of sales = (1- 0.52) + 0.07 = 0.55
36 , 000
( 1−0 . 55 )
36 , 000
=80 , 000
0 . 45
=
b) Y = 0.55x+36,000
C) π = R-C
=75,000-055(75,000) +36,000
=75,000-77250
Loss = (2,250)
1.5 Market Equilibrium 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.

Chapter One, Linear Equations and Their Applications Page 18

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) +10 = birr 30
This implies that, market equilibrium occurs at the point where
quantity is 100 units and price is birr30 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, 30)
20

DD curve = -0.1q + 40
100 quantities

Chapter One, Linear Equations and Their Applications Page 19