Linear

Linear

5-1

Equations
Equations
Apps.
Apps.

Applications of Linear Equations

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5-2

Linear
Linear
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Learning Objectives

After completing this chapter, you will be able to:

LO1.1.
LO

Solve two linear equations with

two variables

LO2.2.
LO

Solve problems that require setting up

linear equations with two variables

Also
Also
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5-3

Linear
Linear

Learning Objectives

Equations
Equations
Apps.
Apps.

LO3.3.
LO

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Perform linear Cost-Volume-Profit and

break-even analysis employing:

A.
A.

- The contribution margin approach

B.
B.

- The algebraic approach of solving

the cost and revenue functions

Linear
Linear
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LO 1.
1.
LO

5-4

Solving Two
Two Equations
Equations with
with
Solving
Two Unknowns
Unknowns
Two

Equations 2x 3y = 6
Equations
x+ y = 2
(A) Solve for y (B) Solve for x
(A) Solve for y
2x 3y = 6
Multiply by 2
x + 2yy == 4
2x
- 5y = -10
Subtract
Divide by -5
yy == 22
(B) Solve for x 2x2x
3(2)
3y == 66
Substitute y = 2
2x 6 = 6
2x = + 6 6
Check
xx == 00
Check

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5-5

Linear
Linear

Solving Two
Two Equations
Equations with
with
Solving
Two Unknowns
Unknowns
Two

Equations
Equations
Apps.
Apps.

2x 3y = 6
x+ y = 2
You should always check your answer by
substituting the values into each of the equations!
xx == 00 yy == 22
Left Side = Right Side
Equations
Equations

Equation 11
Equation
Left Side

Right Side

= 2x 3y
= 2(0) 3(2)
=6
=6
LS = RS
McGraw-Hill Ryerson

Equation 22
Equation

Substituting

Left Side

Right Side

=x+ y
=0+2
=2

=2

LS = RS

Linear
Linear
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LO2.2.
LO

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5-6

Linear
Linear

5-7

Equations
Equations
Apps.
Apps.

York Daycare purchases the same amount of

milk and orange juice each week. After price
increases from $1.10 to $1.15 per litre for milk,
and from $0.98 to $1.14 per can of frozen orange
juice, the weekly bill rose from $84.40 to $91.70.
How many litres of milk and cans of
orange juice are purchased
each week?
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5-8

Linear
Linear
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Purchases
Purchases
Letx
x==##litres
litresof
ofmilk
milk
Letyy==##cans
cansof
oforange
orangejuice
juice
Let
Let

A.
A.
B.
B.
C.
C.

After price increases

from $1.10 to $1.15 per
litre of milk, and from
$0.98 to $1.14 per can
of frozen orange juice,
the weekly bill rose
from $84.40 to
$91.70.

McGraw-Hill Ryerson

Equations
Equations
Development of

(1) 1.10x + 0.98y = 84.40

(2) 1.15x + 1.14y = 91.70

Solving
Solving

5-9

Linear
Linear
Equations
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Apps.
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litresof
ofmilk
milk
xx==##litres

Let
Let

Eliminatexx
Eliminate
byDividing
Dividing
by
by1.10
1.10
by
Eliminatexx
Eliminate
byDividing
Dividing
by
by1.15
1.15
by
McGraw-Hill Ryerson

Letyy==##cans
cansof
oforange
orangejuice
juice
Let

Equation (1)
Equation
1.10x + 0.98y = 84.40
(1.10x + 0.98y)/1.10 = 84.40/1.10
x + 0.8909y = 76.73
Equation (2)
Equation
1.15x + 1.14y = 91.70
(1.15x + 1.14y)/1.15 = 91.70/1.15
x + 0.9913y = 79.74

continue
continue

5 - 10

Linear
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Equations
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Equation
Equation
Equation
Equation

(1)
(2)

x + 0.8909y = 76.73
x + 0.9913y = 79.74

.1004y = 3.01
Subtract
y = 29.98 i.e. 30 cans
Substitute
1.10
x
+
0.98y
=
84.40
Equation
(1)
Equation
into
1.10x + 0.98(29.98) = 84.40
1.10x + 29.38 = 84.40
1.10x = 84.40 - 29.38
1.10x = 55.02
x = 50.02 i.e. 50 litres
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5 - 11

Linear
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Quantity

Price

Litres of Milk

50

$1.15

$57.50

Cans of Orange Juice

30

1.14

34.20

= New Weekly Cost to Purchase

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$91.70

5 - 12

Linear
Linear
Equations
Equations
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LO3.3.
LO

Cost

Analysis
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Terminology

5 - 13

Fixed Costs
Costs
Fixed

Business Costs

Business Expenses

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do NOT change if
sales increase or
decrease
e.g. rent, property taxes, some
forms of depreciation
Variable Costs
Costs
Variable
do change in direct
proportion to sales volume
e.g. material costs,
direct labour costs

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Terminology
Break Even Point
is the point at which

neither
a Profit

Loss is made
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or

5 - 14

Linear
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Terminology

5 - 15

Contribution Margin
isthe
thedollar
dollaramount
amountthat
thatisisfound
foundby
by
is
deductingALL
ALLVariable
VariableCosts
Costs
deducting
fromNet
NetSales
Sales
from
and
and
contributestotomeeting
meeting
contributes
FixedCosts
Costsand
andmaking
makingaaNet
Net
Fixed
Contribution
Rate
Profit.
Profit.
isthe
thedollar
dollaramount
amountexpressed
expressedas
as
is
percent(%)
(%)of
ofNet
NetSales
Sales
aapercent
A Contribution Margin statement
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5 - 16

Terminology

A Contribution Margin Statement

Net Sales(Price * # Units Sold)
Less:
Variable Costs Margin
Contribution
Less: Fixed Costs

Net Income
McGraw-Hill Ryerson

$
x

%
100

xx
x
x

xx
x
x

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Scenario 1

5 - 17

Market research for a new product indicates that the product

can be sold at $50 per unit.
Cost analysis provides the following information:
Fixed Costs per period = $8640
Variable Costs = $30 per unit.
Production Capacity per period = 900 units

uestion: How much does the sale of an additional

unit of a firms product contribute
towards increasing its net income?
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5 - 18

Linear
Linear
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Formulae
Formulae
- To Find -

Contribution Margin
Contribution Rate
*Break Even Point:
...in Units (x)
...in Sales $
...in % of Capacity

CM = S - VC
CR = CM/S * 100%

x = FC / CM
$x = (FC / CM)* S
BEPin Units/PC*100

* At Break Even, Net Profit or Loss = 0

Applying
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Formulae
Formulae

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5 - 19

Formulae
pplying the Formulae

As in the previous scenario, the new product can be sold at $50

per unit. Costs are as follows: Fixed Costs are $8640 for the
period , Variable Costs are $30 per unit, and the Production
Capacity is 900 units per period.

CM = S - VC
CR = CM/S * 100%
Break Even Point:
Units x = FC / CM
In $ x = (FC / CM)* S
BEPin units PC*100
McGraw-Hill Ryerson

= $50 - $30 = $20

= $20/$50 * 100 = 40%
= $8640/$20 = 432 Units
= ($8640/$20)* $50 = $21,600
= 432/ 900*100 = 48% of
Capacity

Linear
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Scenario 2

The Lighting Division of Seneca Electric Co. plans to

introduce a new street light based on
the following accounting information:
FC = $3136 VC = $157. S= $185 Capacity = 320 units

uestion: Calculate the breakeven point

(BEP)
in units
in dollars
as a percent of capacity
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5 - 20

Linear
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Scenario 2

5 - 21

FC = $3136 VC = $157. S= $185 Capacity = 320 units

in units

Break Even Point

= FC / CM
= $3136/ 28 = 112 Units

VC==CM
CM
SSVC
$185157
157==$28
$28
$185

in dollars

= (FC / CM)* S
= ($3136/ 28) * $185 = $20720
as a percent of capacity = BEPin units/PC*100
= 112/320 * 100 = 35% of Capacity
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Linear
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Scenario 2 -1

Equations
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5 - 22

$2688 VC = $157. S= $185 Capacity = 320 units

FC = $3136

Determine the BEP as a % of capacity if

FC are reduced to $2688.

Formula
Formula

=BEPin units/PC*100

Step 1 Find CM

Step 2 Find

Step 3 Find

BEP in units

S = $185
VC = - 157
CM $ 28

= FC/CM
= $2688/ $28
= 96 Units

% of Capacity
=BEPin units /PC*100
= 96/320*100
= 30% of Capacity

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Scenario 2 -2

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5 - 23

$148 S= $185 Capacity = 320 units

FC = $4588
$3136 VC = $157
VC =S*80% = $148
Determine the BEP as a % of capacity if
FC are increased to $4588, and VC reduced to 80% of S.

Formula
Formula

= BEPin units /PC*100

Step 1 Find CM

Step 2 Find

Step 3 Find

BEP in units

S = $185
VC = - 148
CM $ 37

= FC/CM
= $4588/ $37
= 124 Units

% of Capacity
=BEPin units /PC*100
= 124/320*100
= 39% of Capacity

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Scenario 2 -3

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5 - 24

$171Capacity = 320 units

FC = $3136 VC = $157 S= $185

Determine the BEP as a % of capacity if

S is reduced to $171.
Formula
Formula
Step 1 Find CM
S = $ 171
VC = -157
CM $ 14
McGraw-Hill Ryerson

= BEPin units /PC*100

Step 2 Find

Step 3 Find

BEP in units

% of Capacity
=BEPin units /PC*100
= 224/320*100
= 70% of Capacity

= FC/CM
= $3136/ $14
= 224 Units

Scenario 2 -4

Linear
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5 - 25

FC = $3136 VC = $157 S= $185 Capacity = 320 units

Determine the NI if 134 units are sold!

Formula
Formula

NI = #Units above BEP*CM

Step 1 Find CM

Step 2 Find

S = $185
VC = - 157
CM $ 28

= FC/CM
= $3136/$28
= 112 Units

CM of $28 per unit

McGraw-Hill Ryerson

BEP in units

Units
Sold
134
BEP
112
Over BEP 22

Company had a NI of 22* $28 = $616.

Scenario 2 -5

Linear
Linear
Equations
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5 - 26

FC = $3136 VC = $157 S= $185 Capacity = 320 units

What unit sales will generate NI of $2000?

Formula
Formula

#Units above BEP = NI/CM

Step 1 Find CM

Step 2 Find

S = $185
VC = - 157
CM $ 28

= FC/CM
= $3136/$28
= 112 Units

CM of $28 per unit

McGraw-Hill Ryerson

BEP in units

NI/CM
NI/CM
= $2000/$28 per Unit
= 72 Units above

Break Even
72Units
Units++112
112BEP
BEPUnits
Units
72
TotalSales
SalesUnits
Units==184
184
==Total

Scenario 2 -6

Linear
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5 - 27

FC = $3136 VC = $157 S= $185 Capacity = 320 units

What are the unit sales if there is a Net Loss of $336?

Formula
Formula

# Units below BEP = (NI)/CM

Step 1 Find CM

Step 2 Find

S = $185
VC = - 157
CM $ 28

= FC/CM
= $3136/$28
= 112 Units

CM of $28 per unit

McGraw-Hill Ryerson

BEP in units

(NI)/CM
(NI)/CM
= ($336)/$28 per Unit
= 12 Units below

Break
Even
112
BEP
12
Units
Below
112 BEP - 12 Units Below
TotalSales
SalesUnits
Units==100
100
==Total

Scenario 2 -7

Linear
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5 - 28

272units
FC = $3136 VC = $157 S= $185 Capacity = 320
The company operates at 85% capacity. Find the Profit or Loss.

Step 1 Find CM

Step 2 Find

S = $185
VC = - 157
CM $ 28

= FC/CM
= $3136/$28
= 112 Units

BEP in units

CM of $28 per unit

Formula
Formula

320*.85
320*.85
272
==272
Units
Units
Production 272
272
Production
BEP
112
BEP
112
Over BEP
BEP 160
160
Over

# units above BEP *CM = NI

160Units
Units**$28
$28==Profit
Profit$4480
$4480
160

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Case

5 - 29

The Marconi Co. year end operating results were as follows:

Total Sales of $375000
Operated at 75% of capacity
Total Variable Costs were $150000
Total Fixed Costs were $180000
What was Marconis BEP expressed in dollars of sales?

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5 - 30

Case

The Marconi Co. year end operating results were as follows:

Total Sales of $375000
Operated at 75% of capacity
Total Variable Costs were $150000
Total Fixed Costs were $180000
What was Marconis BEP expressed in dollars of sales?
Whatinformation
informationisisneeded
neededto
tocalculate
calculatethe
the$BEP?
$BEP?
What
1. Number
Number
1.
of
of
Units sold
sold
Units
McGraw-Hill Ryerson

2. VC
VC
2.
per
per
Unit
Unit

3. CM
CM
3.

4. Total
Total
4.
Costs
Costs

5. BEP
BEP
5.
in $$
in

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5 - 31

Case

The Marconi Co. year end operating results were as follows:

Total Sales of $375000
Operated at 75% of capacity
Total Variable Costs were $150000
Total Fixed Costs were $180000
What was Marchonis BEP expressed in dollars of sales?

1. Number
Number
1.
of
of
Units sold
sold
Units
2. VC
VC
2.
per
per
Unit
Unit
3. CM
CM
3.
McGraw-Hill Ryerson

Let S = $1 and X be the Number of $1 Units sold

Sales of $375 000 = 375000 Total Units sold
Total VC
=
Total Unit Sales
S
$1.00
VC
.40
CM $ .60

$150000
375000

= $0.40pu

Linear
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Case

The Marconi Co. year end operating results were as follows:

Total Sales of $375000
Operated at 75% of capacity
Total Variable Costs were $150000
Total Fixed Costs were $180000
What was Marchonis BEP expressed in dollars of sales?

4. Total
Total
4.
Costs
Costs

TC = FC + VC = $180 000 + 0.40X

$BEP = (FC/CM)*S
= ($180000/0.60)*$1.00
OfUnits
Units
= (300000)*$1.00
##Of
in $$
in
= $300000 $BEP

5. BEP
BEP
5.

McGraw-Hill Ryerson

5 - 32

5 - 33

Linear
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This completes Chapter 5

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