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Outline
1 Revenue Functions
2 Cost Functions
3 Profit Functions
4 Break-even Analysis
5 Summary
Revenue Functions
Revenue Functions
If total sales revenue, R, and the number of units sold, x, are
linearly related, then the sales revenue function is R(x) = px
where x 0 and p is the unit selling price of the product.
If a firm sells n products, and let xi = number of units sold for
product i , and pi = unit selling price of product i , then
R(x1 , x2 , . . . , xn ) = p1 x1 + p2 x2 + + pn xn
or simply
R=
n
X
i =1
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pi xi
Cost Functions
Cost Functions
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Cost Functions
n
X
vi xi + F
i =1
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Profit Functions
Profit Functions
If we assume that both the revenue function and cost function are
linear, then the profit function or the profit generated by producing
x units of the product, is also a linear function of x.
P(x) = R(x) C (x),
or
P(x1 , x2 , . . . , xn ) = R(x1 , x2 , . . . , xn ) C (x1 , x2 , . . . , xn )
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Profit Functions
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Profit Functions
Example 1
A company produces a product which it sells for $55 per unit.
Each unit costs the firm $23 in variable expenses, and fixed costs
on an annual basis are $400,000. If x equals the number of units
produced and sold during the year.
a. Formulate the linear total revenue function.
b. Formulate the linear total cost function.
c. Formulate the linear profit function.
d. What does annual profit equal if 10,000 units are produced
and sold during the year?
e. What level of output is required in order to earn zero profit?
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Profit Functions
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Profit Functions
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Profit Functions
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Profit Functions
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Profit Functions
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Profit Functions
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Profit Functions
(d) What does annual profit equal if 10,000 units are produced and
sold during the year?
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Profit Functions
(d) What does annual profit equal if 10,000 units are produced and
sold during the year?
Sol. x = 10000, then the annul profit is
P(10000) = 22(10000) 400000
= 80000.
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Profit Functions
(d) What does annual profit equal if 10,000 units are produced and
sold during the year?
Sol. x = 10000, then the annul profit is
P(10000) = 22(10000) 400000
= 80000.
(e) What level of output is required in order to earn zero profit?
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Profit Functions
(d) What does annual profit equal if 10,000 units are produced and
sold during the year?
Sol. x = 10000, then the annul profit is
P(10000) = 22(10000) 400000
= 80000.
(e) What level of output is required in order to earn zero profit?
Sol. Let P(x) = 0, then the level of output is
32x 400000 = 0
x
= 12500.
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Profit Functions
Example 2
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Profit Functions
(a) Find the total cost function (in terms of the number of units of
product produced and sold).
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Profit Functions
(a) Find the total cost function (in terms of the number of units of
product produced and sold).
Sol.: Cost function = fixed cost + variable cost,
C (x) = 3000 + 40%(5x)
= 2x + 3000.
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Profit Functions
(a) Find the total cost function (in terms of the number of units of
product produced and sold).
Sol.: Cost function = fixed cost + variable cost,
C (x) = 3000 + 40%(5x)
= 2x + 3000.
(b) Find the profit function and interpret the meaning of its slope.
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Profit Functions
(a) Find the total cost function (in terms of the number of units of
product produced and sold).
Sol.: Cost function = fixed cost + variable cost,
C (x) = 3000 + 40%(5x)
= 2x + 3000.
(b) Find the profit function and interpret the meaning of its slope.
Sol.: P(x) = R(x) C (x), since R(x) = 5x,
P(x) = 5x (2x + 3000)
= 3x 3000
Slope of profit function is 3 that means the marginal profit is $3,
the profit increases by $3 by selling the next unit of product.
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Profit Functions
Most revenue and cost functions (and thus the profit functions)
may not be linear and may actually take the form of quadratic
functions, especially if the price is variable.
Reminder: Revenue = Unit selling price Number of units sold
N.B.: The revenue function may be expressed in terms of quantity
sold, R(q) , or in terms of selling price, R(p) .
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Profit Functions
Example 3
The weekly demand function for a particular product is
q = f (p) = 2400 15p where q is stated in units and p is stated
in dollars.
a. Determine the quadratic total revenue function, where R is a
function of p, or R(p) .
b. What is the concavity of the function?
c. What does total revenue equal at a price of $50?
d. How many units will be demanded at this price?
e. At what price will total revenue be maximized?
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Profit Functions
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Profit Functions
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(1)
Profit Functions
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(1)
Profit Functions
(1)
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Profit Functions
(1)
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Profit Functions
(1)
Profit Functions
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Profit Functions
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Profit Functions
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Profit Functions
2400
= 80.
30
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Break-even Analysis
Break-even Analysis
The break-even point is where the total sales revenue equals total
cost, or zero total profit; i.e.
R(x) = C (x),
or
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P(x) = 0.
Break-even Analysis
Example 4
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Break-even Analysis
(a) Determine the linear revenue, cost and profit functions in terms
of the number of handbags q manufactured.
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Break-even Analysis
(a) Determine the linear revenue, cost and profit functions in terms
of the number of handbags q manufactured.
Sol.
R(q) = 420q
C (q) = 30000 + 180q
P(q) = 240q 30000
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Break-even Analysis
(a) Determine the linear revenue, cost and profit functions in terms
of the number of handbags q manufactured.
Sol.
R(q) = 420q
C (q) = 30000 + 180q
P(q) = 240q 30000
(b) How many handbags must be produced and sold in order to
break even?
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Break-even Analysis
(a) Determine the linear revenue, cost and profit functions in terms
of the number of handbags q manufactured.
Sol.
R(q) = 420q
C (q) = 30000 + 180q
P(q) = 240q 30000
(b) How many handbags must be produced and sold in order to
break even?
Sol. Set P(q) = 0,
240q 30000 = 0
q = 125.
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Break-even Analysis
Example 5
A firms total cost function is given by the equation
C (q) = 200 + 3q, while the demand function is given by the
equation p(q) = 107 2q.
a. Write down the total revenue function in terms of level of
production, R(q).
b. Write down the profit function in terms of level of production.
c. Determine the level of production required to break even.
d. Determine the level of production that would result in
maximum profit.
e. Determine the expected maximum profit.
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Break-even Analysis
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Break-even Analysis
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Break-even Analysis
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Break-even Analysis
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Break-even Analysis
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Break-even Analysis
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q = 50.
Break-even Analysis
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Break-even Analysis
104
= 26.
4
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Break-even Analysis
104
= 26.
4
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Break-even Analysis
104
= 26.
4
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Break-even Analysis
Example 6
The total cost function for producing a product is
C = f (x) = 100x 2 + 1300x + 1000, where x equals the number of
units produced (in thousands) and C equals total cost (in
thousand of dollars). Each unit of the product sells for $2000.
Using x as defined above, formulate the total revenue function
(stated in thousands of dollars) and determine
a. the level(s) of production required to break even.
b. the level of output that would result in maximum profit.
c. the expected maximum profit.
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Break-even Analysis
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Break-even Analysis
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Break-even Analysis
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Break-even Analysis
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Break-even Analysis
Summary
Summary
Revenue function [R(x)]: Number of product sold the
selling price of the product
Cost function [C (x)]: Fixed cost + Variable Cost
Profit function [P(x)] = Revenue function [R(x)] - Cost
function [C (x)]
Break even: P(x) = 0 or R(x) = C (x)
Break even point(s): the quantity (x) such that the
break-even happens
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