Cost, Revenue, Profit

Function

Applications: Linear Function

Cost Function
Two types of cost in the
producing of a commodity:
1) the fixed costs and
2) the variable costs

Cost Function
Fixed costs are costs that have
to be met no matter what the
quantity of a
commodity is
produced.
Examples: rent, interest on loans
Variable costs are costs that
depend on the level of production.
Examples: material costs and
labor costs

Cost Function
Formula:

Total Costs = Variable Costs +

Fixed Costs
TC = VC(x) + FC
Y = mx + b
where: m pesos denotes the variable
cost
per unit,
b pesos represents the fixed costs and
y denotes the cost (in pesos) of
producing
x units.
(The graph of equation above is again a straight line whose slope represents
the variable cost per unit and whose y-intercept gives the fixed cost.)

Cost Function
Examples 1. It costs JBL Company
2,000 to produced 10 dresses per
day and 2,800 to produced 15
units of the same item per day.
a) Determine the cost equation,
assuming it to be linear.
b) What is the cost of producing 20
units per day?
c) What are the variable cost per item
and the fixed cost?

Cost Function
Examples 2. The cost per unit of
toy is 80 while the overhead cost
is established to be 5,800 per
week. Determine the cost equation
and total cost of 200 toys.

Revenue Function

Revenue Function
- total revenue from the sale of
x number of units of a
commodity.
-it is simply the product the
number of units sold and the
price per unit.

Revenue Function
Formula:

Total Revenue = Selling Price

TR = SP(x)
y = mx
where: y = TR denotes the total revenue,
m = S represents the price per unit and
x gives the units sold.
(The graph of the revenue function is a straight
line which passes through the origin).

Revenue Function
Example 3. A firm producing hand
calculators sells a calculator for 425.
a) Determine the revenue equation.
b) How much is the firms revenue if
there are 125 calculators sold?
c) Graph the revenue function.

Example 4. The selling price of a road

bike is 10,000. The store can sell 6
bikes per week. Determine the revenue
equation and the total cost for the week.

Profit Function
Profit Function
the total gain in producing and selling
commodities.
the difference of total revenue and total
cost.

Formula:Total Profit = Total Revenue

Total Cost
TP = TR TC

(The graph is again a straight line)

Profit Function

Example 5. ABC firm anticipates

selling tables at 250 each. The
fixed cost of manufacturing these
tables is 60, 000 whereas the
variable cost per table is 90. Plant
capacity prohibits the production of
more than 1000 tables per month.
What is the firms profit if there were
1000 tables produced and sold?

Profit Function
Example 6. The total cost of
manufacturing shoes is given by
TC = 100x + 21,500
and the total revenue estimate is
given by
TR = 120x.
Determine the profit equation and the
total profit of manufacturing 2000 shoes.

Break-Even Analysis

Break Even Analysis

One of the basic problems of business

is to determine how many units of a
product must be sold in order to make
profit. In section 2.4, we have
discussed cost, revenue and profit
functions. In this section, we once
again discuss how these functions are
related. Thus suppose:

Break Even Analysis

R = the revenue received from selling x
units of the product
C = the cost of manufacturing or
purchasing x units of the product

If R > C, then there is a profit on the x
units.
If R < C, There is a loss.
If R = C, then there is neither a profit nor
a loss. The value of x for which

R = C is called the break-even

point.

Break Even Analysis

A break-even graph in simplified form is
shown in Figure 3.1

y axis

Cost
R

Revenue

C

FC

x axis

Quantity

Break Even Analysis

Example 1. For a shoemaker, the cost
of labor and material per pair of shoes
is
P45.00 and the fixed costs
are P2,700 per day. If each pair of
Shoes sells for P65.00, how many
pairs should be produced and
Sold each day to guarantee that the
business break-even? Graph.

 Example 8. Determine the

equilibrium price and quantity for the
following equations.
3x + 5y = 200
7x + 3y = 56

ASSIGNMENT