Linear Equations & Functions (Problem Set 1 – 5)

Problem Set 1 – 5
4
Text: G. D. Prichett & J. C. Saber
Solutions: Muhammad Shamim
Given that total cost incurred in producing and selling q
units of a product is C(q) = 6q + 10000, and the q units are
sold at a price of $46 per unit, mark (T) for true or (F) for
false:

1 ( ) Total cost for 1000 units is $16000.

Solution: The statement is true (T).

Explanation: When q = 1000 units, then
TC = 6q + 10000
= 6(1000) + 10000
= 6000 + 10000
= $16000

2 ( ) Average cost per unit is $6 no matter how many units are

made and sold.

Solution: The statement is false (F).

Explanation: We know, average cost per unit is inversely related to the
number of units made and sold. So it is not free from number of units.

3 ( ) Average price is $46 per unit no matter how many units are
made sold.
Solution: The statement is true (T).

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Explanation: We know, price per unit and average price per unit are
same. So average price per unit is free from number of units.

4 ( ) Every additional unit made and sold increases total cost by $6.
Solution: The statement is true (T).
Explanation: Each additional unit means each additional marginal unit.
Since marginal unit is constant for any unit(s) made, so every additional
unit increases total cost by $6.

5 ( ) Variable cost is the same at different values of q.

Solution: The statement is false (F).
Explanation: Variable cost is homogenously related to number of units
made. So variable cost is not same at different values of q.

6 ( ) When 1000 units are made and sold, variable cost will be
$6000.
Solution: The statement is true (T).
Explanation: When q = 1000 units, then
VC = 6q
= 6(1000)
= $6000

7 ( ) Marginal cost is the same at all values of q.

Solution: The statement is true (T).
Explanation: Since marginal cost per unit is a constant coefficient, it is
same at all values of q.

8 ( ) Marginal cost is the same as average cost per unit.

Solution: The statement is false (F).
Explanation: Marginal cost is same as variable cost per unit, not
average cost per unit.

9 ( ) A loss will be incurred if 200 units are made and sold.

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 Linear Equations & Functions (Problem Set 1 – 5)
Solution: The statement is true (T).
Explanation: When q = 200 units, then
Profit = TR – TC
= pq – (6q + 10000)
= 46q – (6q + 10000)
= 40q – 10000
= 40(200) – 10000
= 8000 – 10000
= – $2000, which shows a loss of $2000.

10 ( ) A profit will be made if 250 units are made and sold.

Solution: The statement is false (F).
Explanation: When q = 250 units, then
Profit = TR – TC
= pq – (6q + 10000)
= 46q – (6q + 10000)
= 40q – 10000
= 40(250) – 10000
= 10000 – 10000
= $0, which shows no profit.
11 ( ) Total cost is zero if no units are produced.

Solution: The statement is false (F).

Explanation: When no units are produced, then q = 0.
TC = TR – TC
= 6q + 10000
= 6(0) + 10000
= 0 + 10000
= $10000
So total cost is not zero.

12 ( ) A total of 250 units must be made and sold in order to

breakeven.

Solution: The statement is true (T).

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Explanation: When q = 250 units, then

Profit = TR – TC
= pq – (6q + 10000)
= 46q – (6q + 10000)
= 40q – 10000
= 40(250) – 10000
= 10000 – 10000
= $0, which shows neither profit nor loss or breakeven position.

13 A manufacturer has a fixed cost of $60000 and a variable cost of

$2 per unit made and sold. Selling price is $5 per unit.
(a) Find the revenue, cost, and profit functions using q for
number of units.
(b) Compute profit if 25000 units are made and sold.
(c) Compute profit if 10000 units are made and sold.
(d) Find the breakeven quantity.
(e) Find the breakeven dollar volume of sales (revenue).
(f) Construct the breakeven chart. Label the cost and revenue
lines, the fixed cost line, and the breakeven point.

Solution:
(a) Given fixed cost (c) = 60000
variable cost per unit (m) = 2
selling price (p) = 5

Revenue(R) = pq
= 5q (Ans)
Cost (C) = mq + c
= 2q + 60000 (Ans)
Profit = R – C
= 5q – (2q + 60000)
= 3q – 60000. (Ans)

(b) When q = 25000,

Profit = 3(25000) – 60000
= $15000 (Ans)

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(c) When q = 10000, then
Profit = 3(10000) – 60000
= - 30000, which shows a loss of $30000. (Ans)

(d) For breakeven quantity,

R=C
 5q = 2q + 60000
 3q = 60000
 q = 20000 units. (Ans)

(e) When q = 20000,

Revenue(R) = 5(20000)
= $100000 (Ans)

(f) Please see FIGURE S on text book page 989.

14 A manufacturer has fixed cost of $120000 and a variable cost of

$20 per unit made and sold. Selling price is $50 per unit.
(a) Find the revenue, cost, and profit functions using q for
number of units.
(b) Compute profit if 10000 units are made and sold.
(c) Compute profit if 1000 units are made and sold.
(d) Find the breakeven quantity.
(e) Find the breakeven dollar volume of sales (revenue).
(f) Construct the breakeven chart. Label the cost and revenue
lines, the fixed cost line, and the breakeven point.
Solution:
(a) Given fixed cost (c) = 120000
variable cost per unit (m) = 20
selling price (p) = 50

Revenue(R) = pq
= 50q (Ans)
Cost (C) = mq + c
= 20q + 120000 (Ans)
Profit = R – C
= 50q – (20q + 120000)
= 30q – 120000. (Ans)

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(b) When q = 10000,
Profit = 30(10000) – 120000
= $180000 (Ans)

(c)When q = 1000, then

Profit = 30(1000) – 120000
= - 90000, which shows a loss of $90000.(Ans)

(d) For breakeven quantity, R = C

 50q = 20q + 120000
 30q = 120000
q = 4000 units. (Ans)

(e) When q = 4000,

Revenue(R) = 50(4000)
= $200000 (Ans)

(f) Please see FIGURE T on text book page 990.

15 A company has a linear total cost function and has determined

that over the next three months it can produce 1000 units at a total
cost of $300000. This same manufacturer can produce 2000 units at
a total cost of $400000. The units sell for $180 each.
(a) Determine the revenue, cost, and profit functions using q for
number of units.
(b) What is the fixed cost?
(c) What is the marginal cost?
(d) Find the breakeven quantity.
(e) What is the breakeven dollar volume of sales?

Solution:
(a) Given q1 = 1000, q1 = 2000, y1 = 300000, y 2 = 400000,
selling price (p) = 180

Revenue(R) = pq
= 180q (Ans)
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For cost function,

q  q1 y  y1

q1  q 2 y1  y 2
q  1000 y  300000
 
1000  2000 300000  400000
q  1000 y  300000
 
1 100
 y – 300000 = 100q – 100000
 y = 100q + 200000 (Ans)

Profit = R – C
= 180q – (100q + 200000)
= 80q – 200000 (Ans)

(b) Fixed cost (c) = $200000 (Ans)

(c) Marginal cost (m) = $100 (Ans)

(d) For breakeven quantity,

R=C
 180q = 100q + 200000
 q = 2500 units. (Ans)

(e) When q = 2500, then

Revenue(R) = 180(2500)
= $450000 (Ans)

16 A company has a linear total cost function and has determined

that over the next three months it can produce 10000 units at a total
cost of $550000. This same manufacturer can produce 20000 units at
a total cost of $600000. The units selling price per unit is $5.50.
(a) Determine the revenue, cost, and profit functions using q for
number of units.
(b) What is the fixed cost?
(c) What is the marginal cost?
(d) Find the breakeven quantity.
(e) What is the breakeven dollar volume of sales?
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Solution: (a) Given q1 = 10000, q1 = 20000 y1 = 550000 y 2 = 600000,
selling price (p) = 5.50

Revenue(R) = pq
= 5.50q (Ans)

For cost function,

q  q1 y  y1

q1  q 2 y1  y 2
q  10000 y  550000
 
10000  20000 550000  600000
q  10000 y  550000
 
1 5
 y – 550000 = 5q – 50000
 y = 5q + 500000 (Ans)

Profit = R – C
= 5.50q – (5q + 500000)
= 0.50q – 500000. (Ans)

(b) Fixed cost (c) = $500000 (Ans)

(c) Marginal cost (m) = $5 (Ans)

(d) For breakeven quantity,

R=C
 5.50q = 5q + 500000
 q = 1000000 units. (Ans)

(e) When q = 1000000, then

Revenue(R) = 5.50(1000000)
= $5500000 (Ans)

17 (See Problem 15.)

(a) What would be the company’s cost if it decided to shut down
operations for the next three months?
(b) If, because of a strike, the most the company can produce is
1000 units, should it shut down? Why or why not?

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Solution: (a) For shut down of operation,
The company’s cost (y) = 100 (0) + 200000
= $200000 (Ans)

(b) When q = 1000,

Profit = 80(1000) – 200000
= - 120000, which shows a loss of $120000.

In case of shut down of operation, the company’s loss = $200000.

Here $120000 < $200000.

So the company should not shut down its operation for bearing a
minimum loss.

18 (See Problem 16.)

(a) What would be the company’s cost if it decided to shut down
operations for the next three months?
(b) If, because of a strike, the most the company can produce is
100000 units, should it shut down? Why or why not?

Solution: (a) For shut down of operation,

The company’s cost (y) = 5 (0) + 500000
= $500000 (Ans)

(b) When q = 100000,

Profit = 0.50(100000) – 500000
= - 450000, which shows a loss of $450000.

In case shut down of operation, the company’s loss = $500000.

Here $450000 < $500000.

So the company should not shut down its operation for bearing a
minimum loss.

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Given that total cost, C is related to sales volume, s, by the
equation C(s) = 1000 + 0.2s, mark (T) for true or (F) for
false:
19 ( ) Variable cost will be $200 on sales of $1000.

Solution: The statement is true (T).

Explanation: When sales (s) = 1000, then
VC = 0.20s
= 0.20(1000)
= $200.
20 ( ) Variable cost per dollar of sales is $0.20.

Solution: The statement is true (T).

Explanation: We know, marginal cost per unit and variable cost per
unit are same. Since marginal cost per unit is $0.20 given in the question,
so variable cost per unit is $0.20.

21 ( ) Fixed cost is $1000.

Solution: The statement is true (T).
Explanation: We know, constant cost is a fixed cost. The question
contains a constant of 1000. So the fixed cost of $1000.

22 ( ) A loss would occur if sales were $1000.

Solution: The statement is false (F).
Explanation: When sales (s) = 1000, then
Profit = Revenue – Cost
= s – (0.20s + 1000)
= s – 0.20s – 1000
= 0.80s – 1000
= 0.8(1000) - 1000
= 800 - 1000
= - 200, which shows a loss of $200.

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23 ( ) Sales of $2000 would lead to a profit of $600.

Solution: The statement is true (T).

Explanation: When sales (s) = 2000, then

Profit = Revenue – Cost
= s – (0.20s + 1000)
= s – 0.20s – 1000
= 0.80s – 1000
= 0.8(2000) - 1000
= 1600 - 1000
= $600.

24 ( ) The cost-sales line rises $2 for each increase of $10 in sales

volume.

Solution: The statement is true (T).

Explanation: When sales (s) = 10, then

Increment of cost-sales line = 0.20s
= 0.20(10)
= $2.

25 ( ) Average cost per dollar of sales is the same at various sales

levels.
Solution: The statement is false (F).

Explanation: We know, average cost is homogenously related to sales

level. So average cost is not same at different sales levels.

26 ( ) The slope of the line is interpreted as variable cost.

Solution: The statement is false (F).
Explanation: We know, the slope of the line is interpreted as marginal
cost, not as variable cost.

27 ( ) Variable cost is constant.

Solution: The statement is false (F).

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Explanation: We know, fixed cost is constant, not variable cost.

28 ( ) Variable cost per dollar of sales is constant.

Solution: The statement is true (T).

Explanation: We know, marginal cost per unit and variable cost per unit
are same. Since marginal cost per unit is constant, so variable cost per
unit is also constant.

29 A company expects fixed cost of $22800. Margin is to be 55

percent of retail. Variable cost in addition to costs of goods is
estimated at $0.17 per dollar of sales.
(a) Find the revenue, cost, and profit functions using s for sales
volume.
(b) Find the breakeven point.
(c) What will net profit before taxes be on sales of $75000?
(d) Draw the breakeven chart.

Solution: (a) Given fixed cost (c) = 22800

margin = 0.55
variable cost per unit = 0.17

Revenue(R) = s (Ans)

Cost (C) = total variable cost + fixed cost

= [0.17 + (1 – 0.55)] + 22800
= 0.62s + 22800 (Ans)

Profit = R – C
= s – (0.62s + 22800)
= 0.38s – 22800. (Ans)

(b) For breakeven quantity,

R=C
 s = 0.62s + 22800
 s = 60000 units. (Ans)

(c) When q = 75000,

Profit = 0.38(75000) – 22800
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= $5700.(Ans)

(d) Please see FIGURE U on text book page 990.

30 A company expects fixed cost of $36000. Margin is to be 52

percent of retail. Variable cost in addition to costs of goods is
estimated at $0.07 per dollar of sales.
(a) Find the revenue, cost, and profit functions using s for sales
volume.
(b) Find the breakeven point.
(c) What will net profit before taxes be on sales of $75000?
(d) Draw the breakeven chart.

Solution: (a) Given fixed cost (c) = 36000

margin = 0.52
variable cost per unit = 0.07

Revenue(R) = s (Ans)

Cost (C) = total variable cost + fixed cost

= [0.07 + (1 – 0.52)] + 36000
= 0.55s + 36000 (Ans)

Profit = R – C
= s – (0.55s + 36000)
= 0.45s – 36000. (Ans)

(b) For breakeven quantity,

R=C
 s = 0.55s + 36000
 s = 80000 units. (Ans)
(c) When q = 75000, Profit = 0.45(75000) – 36000 = - $2250.(Ans)

(d) Please see FIGURE V on text book page 990.

31 A company has a linear total cost function and has determined

that it has a total cost of $36836 on sales of $15000. This same
company has a total cost of $41536 on sales of $25000. Find:
(a) The revenue, cost, and profit functions using s for sales
volume.
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(b) The variable cost per dollar of sales.
(c) The fixed cost.
(d) The variable cost on sales of $72000?
(e) The total cost on sales of $72000?
(f) The breakeven dollar volume of sales.
(g) The net profit before taxes on sales of $80000?

Solution: (a) Given s1 = 15000, s1 = 25000, y1 = 36836, y 2 = 41536.

Revenue(R) = s (Ans)

For cost function,

s  s1 y  y1

s1  s 2 y1  y 2
s  15000 y  36836
 
15000  25000 36836  41536
s  15000 y  36836
 
100 47
 100y – 3683600 = 47s – 705000
 y = 0.47s + 29786 (Ans)

Profit = R – C
= s – (0.47s + 29786)
= 0.53s – 29786. (Ans)

(b) Variable cost per dollar of sales (m) = $0.47(Ans)

(c) Fixed cost = $29786 (Ans)

(d) When s = 72000,
variable cost = 0.47(72000)
= $33840 (Ans)

(e) When s = 72000,

Total cost (y) = 0.47(72000) + 29786
= $63626 (Ans)

(f) For breakeven quantity,

R=C
 s = 0.47s + 29786

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 Linear Equations & Functions (Problem Set 1 – 5)
 s = 56200 units. (Ans)

(g) When s = 80000,

Profit = 0.53(80000) – 29786
= $12614. (Ans)

32 A company has a linear total cost function and has determined

that it has a total cost of $30200 on sales of $20000. This same
company has a total cost of $33400 on sales of $30000. Find:
(a) The revenue, cost, and profit functions using s for sales
volume.
(b) The variable cost per dollar of sales.
(c) The fixed cost.
(d) The variable cost on sales of $40000?
(e) The total cost on sales of $40000?
(f) The breakeven dollar volume of sales.
(g) The net profit before taxes on sales of $30000?

Solution: (a) Given s1 = 20000, s1 = 30000, y1 = 30200, y 2 = 33400.

Revenue(R) = s (Ans)

For cost function,

s  s1 y  y1

s1  s 2 y1  y 2
s  20000 y  30200
 
20000  30000 30200  33400
s  20000 y  30200
 
25 8
 25y – 755000 = 8s – 160000
 y = 0.32s + 23800 (Ans)

Profit = R – C
= s – (0.32s + 23800)
= 0.68s – 23800. (Ans)

(b) Variable cost per dollar of sales (m) = $0.32(Ans)

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(c) Fixed cost = $23800 (Ans)

(d) When s = 40000,

variable cost = 0.32(40000)
= $12800. (Ans)

(e) When s = 40000,

total cost (y) = 0.32(40000) + 23800
= $36600 (Ans)

(f) For breakeven quantity,

R=C
 s = 0.32s + 23800
 s = 35000 units. (Ans)

(g) When s = 30000,

Profit = 0.68(30000) – 23800
= - $3400
= $3400 loss. (Ans)

33 If variable cost per dollar of sales remains at last year’s level,

$0.40, but fixed cost this year is $3600 compared to $3000 last year,
how much greater will this year’s breakeven point be than least
year’s?

Solution: Given Last year’s variable cost per unit = 0.40

Last year’s fixed cost = 3000
This year’s fixed cost = 3600

We assume that this year’s variable cost per unit remains unichaged.
 This year’s variable cost per unit = 0.40

For last year’s breakeven point,

Revenue = Cost
 s = Variable Cost + Fixed Cost
 s = 0.40s + 3000
 0.60s = 3000
 s = 5000

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 Linear Equations & Functions (Problem Set 1 – 5)
For this year’s breakeven point,
Revenue = Cost
 s = Variable Cost + Fixed Cost
 s = 0.40s + 3600
 0.60s = 3600
 s = 6000

Required greater change = 6000 – 5000 = $1000 [Ans.]

34 Draw the breakeven chart for the equation in

(a) Problem 31. (b) Problem 32.

Solution: (a) Please see FIGURE W on text book page 991.

(b) Please see FIGURE X on text book page 991.

35 The demand function for a product shifts from

DD: p = – 0.10q + 40
to
DD: p = – 0.10q + 35
Compute the horizontal and vertical shifts and write interpretive
descriptions of these numbers.
Solution: Given DD: p = – 0.10q + 40
DD: p = – 0.10q + 35

(a) We know, vertical shift = difference of price intercepts.

= 40 – 35
= 5, which means that price per unit is $5
lower at every level of quantity demanded.

(b) We know, horizontal shift = difference of quantity intercepts.

Here DD: p = – 0.10q + 40
 0.10q = – p + 40
p  40
 q=
0.10
p 40
 q= 
0.10 0.10

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 q = – 10p + 400

and DD: p = – 0.10q + 35

 0.10q = – p + 35
p  35
 q=
0.10
p 35
 q= 
0.10 0.10
 q = – 10p + 350
 horizontal shift = difference of quantity intercepts.
= 400 – 350
= 50, which means that quantity demanded is 50 units
less at every price level.

36 The demand function for a product shifts from

DD: p = – 0.05q + 40
to
DD: p = – 0.05q + 50
Compute the horizontal and vertical shifts and write interpretive
descriptions of these numbers.
Solution: Given DD: p = – 0.05q + 40
DD: p = – 0.05q + 50

(a) We know, vertical shift = difference of price intercepts.

= 50 – 40
= 10, which means that price per unit is $10
higher at every level of quantity demanded.

(b) We know, horizontal shift = difference of quantity intercepts.

Here DD: p = – 0.05q + 40
 0.05q = – p + 40
p  40
 q=
0.05
p 40
 q= 
0.05 0.05

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 Linear Equations & Functions (Problem Set 1 – 5)
 q = – 20p + 800

and DD: p = – 0.05q + 50

 0.05q = – p + 50
p  50
 q=
0.05
p 50
 q= 
0.05 0.05
 q = – 20p + 1000

 horizontal shift = difference of quantity intercepts.

= 1000 – 800
= 200, which means that quantity demanded is 200
units greater at every price level.

37 Write a descriptive interpretation of a demand function that is

(a) Vertical.
(b) Horizontal.

Solution:
(a) Interpretation on Vertical Nature of a Demand
Function:
When a demand function is vertical, then demand is a constant number
of units at every level of price per unit.

(b) Interpretation on Horizontal Nature of a Demand Function:

When a demand function is horizontal, then price per unit is constant at
every level of demand.

38 The price of a particular raw material varies markedly from

week to week. To be sure that it will be able to obtain this raw
material, a company promises a supplier that it will buy 100 tons per
week at whatever the going price is. Write the demand function
implied by this promise.

Solution: Since the demand is a constant number of units at every level

of price per unit, the demand function is a vertical line and it has only
quantity (q) value but no price (p) value.
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 Required demand function is q = 100. [Ans.]

39 An electric power company charges residential customers a fixed

amount per kilowatt-hour of electricity used. What would be the
graphical nature of the demand function in this case?

Solution: Since the price per unit is constant at every level of demand,
the demand function is a vertical line and it has only price (q) value but
no quantity (q) value.

 Required demand function is p = a constant value. [Ans.]

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