UNIT 8: LINEAR COST MODEL
1. Linear function
2. Linear Cost Function
2.1. Fixed Cost
2.2. Variable Cost
2.3. Linear Cost Function (Total Cost Function)
2.4. Examples on Linear Cost Function
3. Revenue
4. Profit
5. Example
6. Profit/Loss/Break-even
6.1. Example
7. Profit/Loss/Break-even
8. Exercises
Unit 8 Linear Cost Model Business Calculations 1
1. Linear function
A Linear function has the form 𝑓(𝑥 ) = 𝑚𝑥 + 𝑐, where 𝑚 and 𝑐 are
some constant and 𝑚 ≠ 0.
The graph of a Linear function is a straight line.
Linear function are used in Economics, Sciences, Engineering, etc.
2. Linear Cost Function
In the production of any commodity by a firm, there are two types of
costs involved, Fixed cost and Total variable cost.
2.1. Fixed Cost (𝑭𝒄 )
Costs that under normal conditions do not depend on the level of
production of the commodity.
For example, rent, office salaries, equipment, land and normal
maintenance.
2.2. Total Variable Cost (𝑽𝒄 )
Varies with production and includes the cost of raw material,
components, energy and unskilled labour.
𝑉𝑐 is the production of 𝑥 number of goods.
𝑉̅𝑐 is the variable cost per unit, i.e. the cost of producing one item.
𝑉𝑐 = 𝑉
̅𝑐 × 𝑥, i.e.
Total variable cost = variable cost per unit × number of goods.
Page 2 of 7
Unit 8 Linear Cost Model Business Calculations 1
2.3. Linear Cost Function (Total Cost Function)
The total cost function of a commodity over a period of time is the sum
of all expenditures involved in producing a given quantity of the
commodity.
The total cost function relates the quantity 𝑥 to the Total Cost 𝐶 for
producing that quantity, i.e. 𝐶 (𝑥 ).
𝐶 depends on 𝑥.
This example highlights the difference between Total variable cost and
Variable cost per unit.
A company manufactures bicycles, to make 100 bikes it cost
R100 000, but to make 1 bike it cost R1000.
𝑥 is the number of bicycles produced,
the Total variable cost,𝑉𝑐 is R100 000 and
the variable cost per bike, 𝑉̅𝑐 is R1000.
Per unit means one item was made.
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 = (𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 ) × (𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠) + 𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡
̅𝑐 ∙ 𝑥 + 𝐹𝑐
𝐶 (𝑥 ) = 𝑉
𝑉̅𝑐 is the gradient; the rate at which cost changes over the change in
quantity, I.e.,
𝑦 −𝑦
𝑚= 2 1=𝑉 ̅𝑐 = 𝐶2 −𝐶1
𝑥2 −𝑥1 𝑥2 −𝑥1
Page 3 of 7
Unit 8 Linear Cost Model Business Calculations 1
2.4. Examples on Linear Cost Function
1. At R350 per person, an airline anticipates selling 250 tickets for a particular
flight. At R500 per person, the airline anticipates selling 200 tickets for the
same flight.
1.1. What does 𝑥 and 𝐶(𝑥) represent in this problem?
1.2. Calculate the variable cost per ticket.
1.3. Find the value of Fixed cost (𝐹𝑐 ).
1.4. Write down the equation of the total cost equation, 𝐶 (𝑥 ).
2. A business has a fixed cost of R200 and 100 items cost R1000 to produce.
Find the total cost function in terms of 𝑥, assuming that the function is
linear.
3. A business has a marginal cost of R50 and 30 items cost R2000 to produce.
Find the cost function, 𝐶 (𝑥 ), assuming that the function is linear.
Page 4 of 7
Unit 8 Linear Cost Model Business Calculations 1
Note:
𝑉̅𝑐 is a rate (cost per item)
𝑉̅𝑐 is the gradient
∆𝐶
𝑉̅𝑐 is
∆𝑥
Marginal cost is the derivative of 𝐶 (𝑥 ).
Derivative is the gradient
i.e. 𝑉̅𝑐 is the marginal cost
𝑉̅𝑐 is the derivative of 𝐶 (𝑥 ).
4. Revenue
𝑇𝑜𝑡𝑎𝑙 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 = (𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡) × (𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑠𝑜𝑙𝑑 )
𝑅 (𝑥 ) = 𝑝 × 𝑥
Money that flow into a business from selling products or providing
services.
5. Profit
Difference between the total revenue and total cost.
𝑃(𝑥 ) = 𝑅 (𝑥 ) − 𝐶 (𝑥 ).
6. Example
MUT is having a market day next Saturday. To rent a stall for the day
cost R50. Mike decided to sell soft drinks at R13 per can. The cost per
can is R9.
6.1. Write a linear cost function, 𝐶(𝑥) to represent the total cost for the day
if Mike sell 𝑥 amount of cans.
6.2. Suppose Mike has R500 capital. How many cans can he buy?
Page 5 of 7
Unit 8 Linear Cost Model Business Calculations 1
6.3. Calculate the total cost if 55 cans were sold.
6.4. Calculate the income, 𝑅 (𝑥 ), from selling 55 cans at R13 per can.
6.5. Calculate the profit, 𝑃(𝑥), from selling 55 cans.
7. Profit/Loss/Break-even
𝑃 (𝑥 ) > 0 : Profit
𝑃 (𝑥 ) < 0 : Loss
𝑃 (𝑥 ) = 0 : Break-even
𝑅 (𝑥 ) > 𝐶(𝑥) : Profit
𝑅 (𝑥 ) < 𝐶(𝑥) : Loss
𝑅 (𝑥 ) = 𝐶(𝑥) : Break-even
6.6. Continuing with Example 6
How many cans must Mike sell in order to make a profit?
6.7. If Mike aims to make a profit of R500 at the market day, how many cans
should he sell?
8. Exercises
1. Rose will be selling caramel apples at the local market. The cost for each
apple is R1,50 and her weekly fee for renting a stall is R190. Her plan is
to sell the caramel apples at a price of R3,50.
1.1. Write a function, 𝐶(𝑥), to represent her total cost for the week if she
sells 𝑥 amount of caramel apples.
1.2. Write a function, 𝑅 (𝑥 ), to represent her total revenue for selling 𝑥
amount of caramel apples at R3,50 per apple during the week.
Page 6 of 7
Unit 8 Linear Cost Model Business Calculations 1
1.3. Write a function, 𝑃 (𝑥 ), to represent her profits for selling 𝑥 amount
of caramel apples in a given week.
1.4. How many caramel apples must Rose sell in order to make a Profit?
1.5. Rose wants to make a profit of R300. How many caramel apples
should she sell to achieve this goal?
2. A manufacturer sells a product for R10 per unit. The manufacturer’s
fixed costs are R1200 per month and the variable costs are R2,50 per
unit.
2.1. How many units must the manufacturer produce each month to
break-even?
2.2. Graph the total revenue function and total cost function. Show the
loss region, profit region and the break-even point.
Page 7 of 7
