Understanding Fixed and Variable Expenses in Business

1. 2-4FIXED AND VARIABLE EXPENSES OBJECTIVES Understandthe difference between fixed and variable expenses. Createan expense equation based on fixed and variable expenses.

2. variable expenses fixed expenses expense equation E = V + F revenue revenue equation R = pq profit loss breakeven point Key Terms

3. Example 1 The art students have researched all of their potential expenses. The fixed expenses are $17,600. The labor and materials required for each pair of painted jeans produced cost $7.53. Represent the total expenses as a function of the quantity produced, q.

4. CHECK YOUR UNDERSTANDING A widget manufacturer’s expense function is E = 6.00q + 11,000. What are the variable costs to produce one widget?

5. EXAMPLE 2 Kivetsky Ski Supply manufactures hand warmers for skiers. The expense function is E = 1.18q + 12,000. Find the average cost of producing one pair of hand warmers if 50,000 hand warmers are produced.

6. EXAMPLE 3 Willie’s Widgets has created a demand function for its widgets, where q is the quantity demanded and p is the price of one widget q = –112p + 4,500 Its expense function is E = 3.00q + 18,000. Express the expense function as a function in terms of p.

7. EXAMPLE 4 Wally’s Widget World created a monthly expense equation, E = 1.10q + 4,200. Wally’s Widget World plans to sell its widgets to retailers at a wholesale price of $2.50 each. How many widgets must be sold to reach the breakeven point?

8. CHECK YOUR UNDERSTANDING If the company sells 2,900 widgets, is Wally’s Widget World operating above or below the breakeven point? What is the difference between revenue and expense?

9. CHECK YOUR UNDERSTANDING Algebraically find the breakeven point for the expense function, E = 5.00q + 60,000, and the revenue function, R = 7.00q.