Documente Academic
Documente Profesional
Documente Cultură
QUANTITATIVE METHODS
WORKBOOK
WORKBOOK
ENRICHMENT EXERCISES
WITH SOLUTIONS
Page 1
Page 2
TABLE OF CONTENTS
SECTION
TOPIC
PAGE NO
DESCRIPTIVE STATISTICS
BASIC PROBAIBLITY
13
PROBABILITY DISTRIBUTIONS
19
HYPOTHESIS TESTING
25
32
39
DECISION ANALYSIS
49
APPENDIX 1
FORMULAE
55
APPENDIX 2
TABLES
58
Page 3
SECTION A
DESCRIPTIVE STATISTICS
Page 4
QUESTION 1
The monthly fuel bills (in $) of a random sample of 50 motorists in a certain city in the US, who commute to work daily
by car, was recorded in a recent survey. The data is presented in the table below.
289
350
510
285
256
365
394
425
350
390
278
560
350
614
400
368
294
533
646
486
616
262
446
364
386
512
444
275
346
318
295
265
495
285
400
288
460
293
668
378
662
602
548
356
528
636
414
385
544
335
Page 5
QUESTION 2
The table below gives the number of kilolitres of water used in a certain month by 50 randomly selected residents of
a small town.
17
11
20
13
21
22
13
22
17
21
21
15
19
15
23
20
20
18
20
19
18
23
14
22
18
17
15
19
20
20
16
18
18
12
12
22
16
22
16
17
19
12
10
14
14
15
18
19
17
19
Page 6
SOLUTION TO QUESTION 1
1.1 Random variable: monthly fuel bills (in $), Data type: numeric, ratio-scaled, continuous.
1.2 Max = 256, min = 668 Class width = (668
Class
Freq
12
12
10
22
31
35
42
44
50
1.3
Class midpt, x
Freq, f
fx
fx2
280
12
3360
940800
340
10
3400
1156000
400
3600
1440000
460
1840
846400
520
3640
1892800
580
1160
672800
640
3840
2457600
=20840
=9406400
Interpretation: approx. 68.3% of fuel bills lie between $295.60 and $539.00
approx. 95.4% of fuel bills lie between $174.40 and $660.20
approx. 99.7% of fuel bills lie between $53.20 and $781.40
Page 7
1.4.1
14
13
12
11
Frequency
10
9
8
7
6
5
4
3
2
1
0
190
250
310
370
430
490
550
610
670
Page 8
1.4.2
Frequency
10
8
6
4
2
0
200
300
400
500
600
700
800
Page 9
1.4.3
Cumulative Frequency
50
40
30
20
10
Q1
0
200
300
400
500
600
700
SOLUTION TO QUESTION 2
2.1 Random variable: Monthly water usage (no. of kilolitres). Data type: Numeric, ratio-scaled, discrete.
2.2 Max = 23
Min = 10
Class
Freq
10 12
13 15
14
16 18
14
28
19 21
15
43
22 24
50
2.3
Class
midpt, x
Freq, f
fx
fx2
11
55
605
14
126
1764
17
14
238
4046
20
15
300
6000
23
161
3703
= 880
=16118
2.3.1
kl
2.3.2
18.36 kl
2.3.3
2.3.4
2.3.5
19.33 kl
(
kl
IQR = Q3 Q1
(
15.5 kl
20.9 kl
21.9 kl
kl
kl
2.4.
Data is relatively moderately spread around the mean.
Page 12
SECTION B
BASIC PROBABILITY
Page 13
QUESTION 1
In a survey of companies, it was found that 45 were in the mining sector, 72 were in the financial sector, 32 were in
the IT sector and 101 were in the production sector.
1.1
1.2
1.3
1.4
1.5
QUESTION 2
The human resources department of an insurance company analyzed the qualifications profile of their 129 managers
in terms of their highest qualification achieved. The findings are shown in the accompanying two-way pivot table.
Qualification
Matric
Diploma
Degree
Total
Section Head
28
20
?
53
Managerial Level
Dept Head
14
24
10
?
Division Head
?
6
14
28
Page 14
QUESTION 3
A company has three production sections: S1, S2 and S3, which contribute 40%, 35% and 25% respectively to the
total production output. The following percentages of faulty units produced in these sections have been observed.
Section
S1
S2
S3
Faults
2%
3%
4%
Page 15
SOLUTION TO QUESTION 1
1.1
Sector
Mining
Financial
IT
Production
Total
Count
45
72
32
101
250
% frequency
18
28.8
12.8
40.4
SOLUTION TO QUESTION 2
2.1
Qualification
Section Head
Managerial Level
Dept Head
Division Head
Matric
28
14
Diploma
20
24
88
6
Degree
5
53
10
14
48
8
28
Total
Diploma
Page 17
SOLUTION TO QUESTION 3
3.1
FAULTY (0.02)
S1 (0.4)
GOOD (0.98)
FAULTY (0.03)
S2 (0.35)
GOOD (0.97)
TREE DIAGRAM
S3 (0.25)
FAULTY (0.04)
GOOD (0.96)
3.2 Let PS1, PS2 and PS3 denote the probability that a randomly chosen unit came from S1, S2 and S3 respectively,
and let PF1, PF2 and PF3 denote the probability that a faulty item came from S1, S2 and S3 respectively.
PS1 = 0.40
PS2 = 0.35
PS3 = 0.25
PF1 = 0.02
PF2 = 0.03
PF3 = 0.04
The probability that a randomly chosen faulty unit has come from S1 is
Page 18
SECTION C
PROBABILITY DISTRIBUTIONS
Page 19
QUESTION 1
Once a week a merchandiser replenishes the stocks of a particular product brand in the six stores for which she is
responsible. Experience has shown that there is a one in five chance that a given store will have run out of stock
before the merchandisers weekly visit.
1.1
1.2
1.3
1.4
QUESTION 2
A market research company has found from experience that three in ten people are willing to participate in focus
group interviews. The company has been commissioned to conduct a focus group interview on the consumption
patterns of bread for a bakery client.
2.1 If 12 people are approached, what is the probability that only 2 are willing to participate in the interview?
2.2 Five people are required for the interview. What is the probability that the company will find sufficient
consumers to participate in the interview if 12 people are approached?
2.3 What is the probability that the company will recruit more than the required five consumers for the interview
session if it randomly approached 12 people?
QUESTION 3
A motor spares dealer sells, on average, 4 car batteries per week.
3.1 What is the probability that the dealer will sell no more than 2 batteries in a given week?
3.2 If the dealer has 3 batteries in stock at the beginning of a given week, what is the probability that the
dealer will run out of stock in that week?
QUESTION 4
Airline passengers arrive randomly and independently at the passenger screening facility at a major international
airport. The mean arrival rate is 10 passengers per minute. Calculate the probability of:
4.1 no arrivals in a one-minute period.
4.2 at least 2 arrivals in a one-minute period.
4.3 exactly 8 arrivals in a 15-second period.
Page 20
QUESTION 5
The lifetime of a certain type of automatic washing machine is normally distributed with a mean of 3.1 years and a
standard deviation of 1.1 years.
5.1 If this type of washing machine is guaranteed for one year, what percentage of the original sales will require
replacement if they fail within the guarantee period?
5.2 What percentage of the washing machines is likely to be operating after 4 years?
5.3 If the manufacturers of these washing machines wants to ensure that no more than 5% of the machines will be
replaced within the guarantee period, what new guarantee period should they choose?
QUESTION 6
The service time of the first service of a BMW car is found to be normally distributed with a mean of 70 minutes and a
variance of 81 minutes2.
6.1
6.2
6.3
6.4
If a BMW car is brought in for its first service, what is the probability that the car will be ready within one hour?
What is the probability that the service will take more than 90 minutes?
What percentage of first services will be completed between 50 and 60 minutes?
The BMW dealer has a policy to give its customers a 15% discount on the cost of the first service if the service
is not complete within 80 minutes. From a sample of 80 customers who brought their BMW cars in for the first
service, how many are likely to receive the 15% discount?
6.5 If the BMW dealer wants to ensure that no more than 5% of all first services will take longer than 80 minutes,
what should the mean service time be?
Page 21
SOLUTION TO QUESTION 1
1.1 Binomial Distribution. There are only two possible outcomes (in-stock and out-of- tock). Outcomes observed
6 times (n = 6). Probability of observing out of stock outcome (p = 0.2) is constant. The stores (trials) are
independent of one another.
1.2
1.3
1.4
SOLUTION TO QUESTION 2
n= 12, p = 0.3
2.1
Page 22
SOLUTION TO QUESTION 3
3.1
= 4 per week
3.2
Dealer will run out of stock if 4 or more batteries are sold per week
)
= 0.5665
SOLUTION TO QUESTION 4
= 10 per minute
4.1
4.2
SOLUTION TO QUESTION 5
5.1 When x =1, z= (1 - 3.1)/1.1= 1.9091
5.2
When x =4,
5.3
SOLUTION TO QUESTION 6
6.1
x = 60,
6.2
x = 90,
6.3
x = 50,
6.4
x = 80
Page 24
SECTION D
HYPOTHESIS TESTING
Page 25
QUESTION 1
The manager of a large shopping mall believes that visitors to the mall spend, on average, 85 minutes in the mall on
any one occasion. To test this belief, the manager commissioned a study which found that, from a random sample of
132 visitors to the mall, the average visiting time in the mall was 80.5 minutes. Assume that the population standard
deviation is 25 minutes and that the visiting time is approximately normally distributed.
1.1 Formulate suitable null and alternative hypotheses for this test situation.
1.2 Which test statistics, z or t, is appropriate for this test? Why?
1.3 Conduct the appropriate statistical test, at the 5% level of significance, to support or refute the managers belief.
What management conclusion would be drawn from the findings?
QUESTION 2
One-litre cartons of milk are advertized to contain 1 litre of milk are being underfilled. To test this claim, a consumer
council measured a random sample of 20 cartons from different supermarkets. It was found that the average fill was
0.982 litres, with a sample standard deviation of 0.069 litres. Assume that the carton fills are normally distributed.
2.1 Formulate suitable null and alternative hypotheses for this test situation.
2.2 Which test statistics is appropriate for this test? Why?
2.3 Conduct an appropriate statistical test, at the 5% level of significance, to support or refute the managers belief.
What management conclusion would be drawn from the findings?
QUESTION 3
Churn is a term used to describe the rate at which a company loses customers to its competitors. In the
telecommunications industry it is believed that the churn rate between cell phone service providers is not more than
15%. A telecommunications analyst surveyed a random sample of 560 cell phone subscribers and established that
90 of them had changed service providers within the past year.
Is there sufficient statistical evidence at the 10% level of significance to conclude that the churn rate is in excess of
15%? Conduct a suitable hypothesis test and report on the findings.
Page 26
QUESTION 4
A financial analyst asked the following question: Is the average earnings yield of manufacturing companies the
same as the average earnings yield of retail companies? To examine this, the analyst randomly sampled 10
manufacturing companies and 15 retail companies. The sample statistics are given in the table below.
mean (%)
Standard deviation (%)
Size
Manufacturers
8.45
3.32
10
Retailers
10.22
4.14
15
4.1 What statistical assumptions must the financial analyst make before applying an appropriate hypothesis test
between the two means?
4.2 Can the financial analyst conclude that there is no difference in the average earnings yield between the
companies in the manufacturing and retailing sectors? Provide statistical evidence by conducting a
hypothesis test at the 5% level of significance. Also formulate appropriate null and alternative hypotheses.
QUESTION 5
A random sample of 300 Status cheque accounts of Capital Bank showed that 48 were overdrawn. When 250 Elite
cheque accounts at the same bank were examined, it was found that 55 were overdrawn.
Can the bank manager conclude that, proportionately, more Elite cheque account s are likely to be overdrawn than
Status cheque accounts? Test this hypothesis at the 5% level of significance. What conclusion can be drawn?
QUESTION 6
The quality control manager of a tyre manufacturing plant wants to test a belief that the nature of defects found in
manufactured tyres depends on the shift during which the defective tyre is produced. He compiled the following table
showing the number of defective tyres identified by shift and by nature of defect.
Shift
Morning
Afternoon
Night
Technical
15
26
29
Nature of Defect
Mechanical
42
40
25
Material
11
20
14
Is there evidence to substantiate a claim that there is a statistical association between the nature of defective tyres
and the shift on which they are produced? Perform a statistical test at the 5% level of significance to establish
whether or not these two criteria are statistically independent. What conclusion will the quality control manager
communicate to the production manager concerning this issue?
Page 27
SOLUTION TO QUESTION 1
1.1
1.2
1.3
For = 0.05,
Since
Population mean value is significantly different from 85 minutes. Visitors to the shopping mall do not spend 85
minutes on average in the mall..
SOLUTION TO QUESTION 2
2.1
2.2
2.3
Since
significance to reject H0. Hence it must be concluded that, on average, the mean fill of the 1 litre milk
containers is at least 1 litre. The consumer councils claim that the containers are being underfilled is not
valid.
Page 28
SOLUTION TO QUESTION 3
Since ztest =1.9886 > zcrit =1.28 there is sufficient sample evidence at the 10% level of significance to reject H0.
Conclusion: The churn rate in the telecommunications industry exceeds 15%.
SOLUTION TO QUESTION 4
4.1 The variances of the earnings yield between the two populations is normally distributed.
4.2 Let 1 and 2 denote the mean populations earnings yield (%) of the manufacturing and retailing sectors
respectively.
tcalc
x1 x2 ( 1 2 )
(n1 1) s12 (n2 1) s22
n1 n2 2
1
1
n1 n2
Since
reject H0.
Conclusion: There is no difference in the mean earnings yield (%) between manufacturing companies and retail
companies..
Page 29
SOLUTION TO QUESTION 5
Let 1 and 2 denote population proportions of status cheque account clients and elite cheque account clients
respectively
z test
p1 p 2 1 2
1
1
( p q)
n1 n2
0.16 0.22 0
1
1
0.1873 (1 0.1873)
300 250
1.796
Since ztest = -1.796 < zcrit = -1.645 there is sufficient sample evidence to reject H0 at the 5% level o significance.
Conclusion: Proportionately, more elite cheque accounts are overdrawn compared to status cheque accounts.
SOLUTION TO QUESTION 6
H0 : There is no association (relationship) between nature of defect and shift.
H1 : There is an association (relationship) between nature of defect and shift.
Apply Chi-squared test.. = 0.05, df = (3-1)(3-1) = 4
Shift
= 9.488.
Nature of Defect
Technical
Mechanical
Material
Total
Morning
15
42
11
68
Afternoon
26
40
20
86
Night
29
25
14
68
Total
70
107
45
222
Page 30
Since
= 10.082 >
fo
fe
(fo-fe)2/fe
15
21.44
1.935
26
27.12
0.046
29
21.44
2.665
42
32.77
2.597
40
41.45
0.051
25
1.844
11
32.77
13.78
20
17.43
0.378
14
13.78
0.003
=222
=222
=10.081
0.562
Conclusion: The nature of tyre defects is related to the shift in which the defects occur.
Page 31
SECTION E
Page 32
QUESTION 1
The training manager of a company that assembles and exports pool pumps wants to know if there is a link between
the number of hours spent by assembly workers in training and their productivity on the job. A random sample of 10
assembly workers was selected and their performances evaluated. The data is given in the table below
Training hours
20
36
20
38
40
33
32
28
40
24
Output
40
70
44
56
60
48
62
54
63
38
1.1 Draw a scatter plot of the sample data and comment on the likely relationship between the two measures,
i.e hours of training and output.
1.2 Derive a simple regression line equation representing the two measures.
1.3 Calculate the coefficient of determination between the two measures. Interpret the value obtained and advise
the training manager accordingly.
1.4 Estimate the average daily output of an assembly worker who has received only 25 hours of training.
Page 33
QUESTION 2
Companies regularly need to invest capital in their business operations to continue to grow and generate profits. A
business analyst examined the relationship within companies between their level of capital investment (expressed as
a percentage of turnover) and their percentage return on investment (recorded in the financial period after the capital
investment). A random sample of 25 companies was included in the study. The data is shown in the table below.
Company
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
2.1
2.2
2.3
2.4
2.5
Capital investment
(% of turnover)
62.3
45.8
70.3
43.2
33.7
55.1
28.6
63.6
63.0
48.2
73.2
43.4
42.1
55.7
32.8
66.2
64.4
53.1
79.5
50.2
52.0
53.2
31.7
64.2
59.3
ROI (%)
5.1
1.8
3.7
3.3
4.4
4.8
3.3
4.5
5.6
9.5
3.7
8.7
2.1
3.8
1.1
8.8
8.0
2.4
5.2
4.6
4.4
6.7
1.9
6.8
5.0
Page 34
SOLUTION TO QUESTION 1
1.1
Output
70
60
50
40
30
10
15
20
25
30
Training hours
35
40
45
x2
y2
xy
20
40
400
1600
800
36
70
1296
4900
2520
20
44
400
1936
880
38
56
1444
3136
2128
40
60
1600
3600
2400
33
48
1089
2304
1584
32
62
1024
3844
1984
28
54
784
2916
1512
40
63
1600
3969
2520
24
38
576
1444
912
=311
=535
=10213
=29649
=17240
Page 35
n xy x y
n x ( x )
2
y = 18.917 + 1.112x
1.3 r = 0.807
r2 = 0.652
Training hours can explain 65.2% of variability in worker output. The remaining 34.8% due to other factors.
Since 65.2% is a high level of explained variability, the training programme has been very beneficial to worker
output and should therefore be continued.
1.4 y(25) = 18.917 + 1.112 x 25 =46.7 units
Page 36
SOLUTION TO QUESTION 2
2.1
x2
y2
xy
62.3
5.1
3881.29
26.01
317.73
45.8
1.8
2097.64
3.24
82.44
70.3
3.7
4942.09
13.69
260.11
43.2
3.3
1866.24
10.89
142.56
33.7
4.4
1135.69
19.36
148.28
55.1
4.8
3036.01
23.04
264.48
28.6
3.3
817.96
10.89
94.38
63.6
4.5
4044.96
20.25
286.20
63.0
5.6
3969.00
31.36
352.80
10
48.2
9.5
2323.24
90.25
457.90
11
73.2
3.7
5358.24
13.69
270.84
12
43.4
8.7
1883.56
75.69
377.58
13
42.1
2.1
1772.41
4.41
88.41
14
55.7
3.8
3102.49
14.44
211.66
15
32.8
1.1
1075.84
1.21
36.08
16
66.2
8.8
4382.44
77.44
582.56
17
64.4
8.0
4147.36
64.00
515.20
18
53.1
2.4
2819.61
5.76
127.44
19
79.5
5.2
6320.25
27.04
413.40
20
50.2
4.6
2520.04
21.16
230.92
21
52.0
4.4
2704.00
19.36
228.80
22
53.2
6.7
2830.24
44.89
356.44
23
31.7
1.9
1004.89
3.61
60.23
24
64.2
6.8
4121.64
46.24
436.56
25
59.3
5.0
3516.49
25.00
296.50
1334.8
119.2
75673.62
692.92
6639.50
Page 37
2.2
ROI (%)
30
40
50
60
70
Capital investment (% of turnover)
80
90
Comment: There appears to be a weak to moderate association between the companys capital investment and
return of investment.
2.3
n xy x y
n x 2 ( x ) 2
a y bx =
2.4
y = 1.434 + 0.06245x
n xy x y
[n x 2 ( x) 2 ][n y 2 ( y ) 2 ]
Capital investment explains only 13.8% of ROI. This is a very low level of explained variability
Therefore do not invest.
2.5
y = 1.434 + 0.06245x
y(55)=1.434+0.06245(55) = 4.9%
Page 38
SECTION F
Page 39
QUESTION 1
The following table represents the annual tonnage (in 100000 tons) of coal mined in the Limpopo Province for 16
consecutive years.
Year
1
2
3
4
5
6
7
8
Tonnage
118
124
108
120
132
115
122
148
Year
9
10
11
12
13
14
15
16
Tonnage
160
188
201
174
191
178
146
161
Jan -Mar
84
81
69
73
Apr - Jun
53
57
37
46
Jul - Sep
60
51
40
39
Oct Dec
75
73
77
63
Page 40
QUESTION 3
The number of microwave ovens sold by an appliance giant in a city is recorded per quarter, for three consecutive
years from 2010 to 2012. The results are presented in the table below.
2010
2011
2012
Q1
195
158
180
Q2
216
228
198
Q3
232
183
200
Q4
300
298
307
3.3. Use the results of 3.1. and 3.2. above to estimate the number of microwave ovens sold by the
appliance giant in quarter 4 of 2013.
Page 41
SOLUTION TO QUESTION 1
1.1 & 1.2
Year
Tonnage
118
4MA
-
Centred 4MA
-
5MA
-
Centred 5MA
-
124
108
117.5
119.25
120.4
120.1
120
121
119.875
119.8
119.6
132
118.8
120.5
119.4
123.4
115
122.3
125.75
127.4
131.4
122
129.3
132.75
135.4
141
148
136.3
145.375
146.6
155.2
160
154.5
164.375
163.8
169
10
188
174.3
177.5
174.2
178.5
11
201
180.8
184.625
182.8
184.6
12
174
188.5
187.25
186.4
182.2
13
191
186
179.125
178
174
14
178
172.3
170.625
170
15
146
169
16
161
Page 42
1.3
The annual tonnage of coal mined was almost constant for the first 7 years followed by an expansion phase for the
next 4 years. Thereafter the production declined steadily. This could be evidence of a cyclical effect caused by
economic cycles in the demand for coal worldwide.
Page 43
SOLUTION TO QUESTION 2
2.1
No.of Claims
80
70
60
50
40
30
0
10 11 12 13 14 15 16 17 18 19 20
Quarters
2.2
Period, t
Claims, y
t2
ty
-15
84
225
-1260
-13
53
169
-689
-11
60
121
-660
-9
75
81
-675
-7
81
49
-567
-5
57
25
-285
-3
51
-153
-1
73
-73
69
69
37
111
40
25
200
77
49
539
73
81
657
11
46
121
506
13
39
169
507
15
63
225
945
=0
=978
=1360
=-828
Page 44
Interpretation: There is a downward trend in the household policy claims over the past 4 years
2.3
Year
2007
2008
2009
2010
Quarter
Tonnage
4MA
C4MA
SI
Q1
84
Q2
53
Q3
60
68.00
67.625
0.887
Q4
75
67.25
67.750
1.107
Q1
81
68.25
67.125
1.207
Q2
57
66.00
65.750
0.867
Q3
51
65.50
64.000
0.797
Q4
73
62.50
60.000
1.217
Q1
69
57.50
56.125
1.229
Q2
37
54.75
55.250
0.670
Q3
40
55.75
56.250
0.711
Q4
77
56.75
57.875
1.330
Q1
73
59.00
58.875
1.240
Q2
46
58.75
57
0.807
Q3
39
55.25
Q4
63
Q3
Q4
Total
0.887
1.107
Q1
Q2
2007
2008
1.207
0.867
0.797
1.217
2009
1.229
0.67
0.711
1.33
2010
1.24
0.807
Median
1.229
0.807
0.797
1.217
4.050
Adjusted SI
1.214
0.797
0.787
1.202
4.000
Interpretation: Household policy claims tend to increase significantly in the 1st and 4th quarters of each year
by about 20% on average, while there is a significant decline in claims during the 2nd and 3rd quarters by
about 20% on average.
Page 45
SOLUTION TO QUESTION 3
3.1.
4-Q-M-A
CENTRED AVE
SI
231.13
1.004
228
1.316
223.38
0.7073
217
1.051
219.5
0.8337
218.5
1.364
216.88
0.8300
195
216
235.75
232
226.5
300
229.5
158
217.25
228
216.75
183
222.25
298
214.75
180
219
Page 46
198
220.13
0.8995
221.25
200
307
SUMMARY TABLE
Q1
Q2
2010
Q3
Q4
1.004
1.316
0.8337
1.364
2011
0.7073
1.051
2012
0.8300
0.8995
Median
0.7687
0.9753
0.9189
1.340
Typical (Adjusted)
0.7681
0.9746
0.9182
1.339
xy
x2
y2
195
195
38025
216
432
46656
232
696
53824
300
1200
16
90000
158
790
25
24969
228
1368
36
51984
183
1281
49
33489
298
2384
64
88804
3.2.
Page 47
180
1620
81
32400
10
198
1980
100
39204
11
200
2200
121
40000
12
307
3684
144
94249
78
2695
17830
650
633604
Linear regression is
3.3.
In Q4 of 2013, number of microwave ovens sold = 245.34 1.339
= 328.51 329 microwave ovens
Page 48
SECTION G
DECISION ANALYSIS
Page 49
QUESTION 1
An entrepreneur is contemplating opening a petrol station. The annual return will depend on the size of the petrol
station and a number of marketing factors related to the oil industry and the demand for petrol. After a careful
analysis the entrepreneur developed the following table.
Size of Petrol Station
Good Market
50000
80000
100000
300000
Small
Medium
Large
Very Large
1.1
1.2
1.3
1.4
Poor Market
-10000
-20000
-40000
-160000
QUESTION 2
A distributor buys perishable goods at $2 per item and sells them at $5 per item. Demand per day is uncertain and
the items unsold at the end of the day represent a write off because of perishability. If he understocks he loses profit
he could have made. A 300 day record of past activity is given in the table below.
Daily demand (units)
10
11
12
13
Number of days
30
60
120
90
2.1 What level of stock should be held from day to day to maximize profit?
2.2 Draw a decision tree to represent the problem.
Page 50
QUESTION 3
A company has developed a new product. It has to decide whether or not to sell the design for $500000, launch the
product without carrying out any tests or to product test and market test the product before launching. The company
has been advised that even though the tests cost money, they increase the likelihood of success for the product. It
has been agreed within the company that it can only market test the product once it has passed product testing.
Launching the product will cost $300000 and estimates of returns are as follows:
Highly successful: $2000000
Moderately successful: $1000000
Low level success: $500000
Failure: $100000
The company gathered the following historical data.
Outcome
High Success
Medium Success
Low Success
Failure
No Testing
0.10
0.20
0.40
0.30
Product Testing
0.10
0.40
0.40
0.10
Product testing costs $100000 and market testing costs $100000. The probability of passing product testing is 0.80
and the probability of passing market testing is 0.90.
Should the product fail either test it is regarded as worthless and the project is abandoned.
Launching the product will cost $300000 and estimates of returns are as follows:
Highly successful: $2000000
Moderately successful: $1000000
Low-level success: $500000
Failure: $100000
With the aid of a decision tree prepare a quantitative report and advise the company on the optimal course of action.
Page 51
SOLUTION TO QUESTION 1
1.1 Maximax = max(50000, 80000, 100000, 300000) = 300000 open very large station
1.2 Maximin = max(-10000, -20000, -4000,-160000) = -10000 open small station
1.3 Opportunity Loss Table
Size of Petrol Station
Good Market
250000
220000
200000
0
Small
Medium
Large
Very Large
Row Max
Poor Market
0
10000
30000
150000
250000
220000
200000
150000
SOLUTION TO QUESTION 2
2.1 Demand probability:
Daily Demand
10
11
12
13
No of Days
30
60
120
90
Probability
0.1
0.2
0.4
0.3
P
0.1
0.2
0.4
0.3
CP
30
30
30
30
EP
3
6
12
9
50
CP
28
33
33
33
EP = CP x demand probability
EP
2.8
6.6
13.2
9.9
32.5
CP
26
31
36
36
EP
2.6
6.2
14.4
10.8
34
CP
24
29
34
39
EP
2.4
5.8
13.6
11.7
33.5
Page 52
2.2
Conditional Profit
Order 10 Units
$30.00
Order 11 Units
$32.50
$34.00
Order 12 Units
$34.00
$30
$30
$30
$30
$28
$33
$33
$33
$26
$31
$36
Order 13 Units
$33.50
$36
$24
$29
$34
$39
Page 53
SOLUTION TO QUESTION 3
High Success, 0.1
$330000
Launch without test
($300000)
$2000000
$1000000
$500000
$100000
Sell Design
$500000
High Success, 0.1
$510000
Launch Product
($300000)
$534500
$2000000
$1000000
$500000
$100000
$0
$534500
$705000
Launch
($300000
$327600
$500000
Failure, 0.05
$100000
$0
EMV calculations:
EMV(A) = $2000000x0.1 + $1000000x 0.2 + $500000 x 0.4 + 0$100000x0.3 - $300000 = $330000
EMV(B) = $2000000x0.1 + $1000000x 0.4 + $500000 x 0.4 + 0$100000x0.1 - $300000 = $510000
EMV(C) = $2000000x0.2 + $1000000x 0.45 + $500000 x 0.3 + 0$100000x0.05 - $300000 = $705000
EMV(D) = $705000x0.9 - $100000 = $534500 = EMV(E)
EMV(F) = $534500x0.8 - $100000 = $327600
EMV(sell design) = $500000
Page 54
APPENDIX 1
FORMULAE
Page 55
Page 56
jn
4
jn
F) c
4
Qj L
fQ j
jn
100
jn
F) c
100
Pj L
f Pj
position Q j
position Pj
P A B
P(B)
P A B
P( x)
zcalc
n!
x (1 )n x
x!(n x)!
x
/ n
p ( x)
tcalc
x e
x!
x
s/ n
z calc
(1 )
n
z calc
z calc
2 =
x1 x 2 ( 1 2 )
2
1
2
2
s
s
n1 n2
p A p B ( 1 2 )
1
1
( p q)
n A nB
t calc
x1 x 2 ( 1 2 )
(n1 1) s12 (n2 1) s 22
n1 n2 2
nA p A nB pB
nA nB
1
1
n1 n2
q 1 p
fo fe 2
fe
Page 57
APPENDIX 2
TABLES
Page 58
z
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
3.0
0
0.0000
0.0398
0.0793
0.1179
0.1554
0.1915
0.2257
0.2580
0.2881
0.3159
0.3413
0.3643
0.3849
0.4032
0.4192
0.4332
0.4452
0.4554
0.4641
0.4713
0.4772
0.4821
0.4861
0.4893
0.4918
0.4938
0.4953
0.4965
0.4974
0.4981
0.4987
0.01
0.0040
0.0438
0.0832
0.1217
0.1591
0.1950
0.2291
0.2611
0.2910
0.3186
0.3438
0.3665
0.3869
0.4049
0.4207
0.4345
0.4463
0.4564
0.4649
0.4719
0.4778
0.4826
0.4864
0.4896
0.4920
0.4940
0.4955
0.4966
0.4975
0.4982
0.4987
0.02
0.0080
0.0478
0.0871
0.1255
0.1628
0.1985
0.2324
0.2642
0.2939
0.3212
0.3461
0.3686
0.3888
0.4066
0.4222
0.4357
0.4474
0.4573
0.4656
0.4726
0.4783
0.483
0.4868
0.4898
0.4922
0.4941
0.4956
0.4967
0.4976
0.4982
0.4987
0.03
0.0120
0.0517
0.0910
0.1293
0.1664
0.2019
0.2357
0.2673
0.2967
0.3238
0.3485
0.3708
0.3907
0.4082
0.4236
0.4370
0.4484
0.4582
0.4664
0.4732
0.4788
0.4834
0.4871
0.4901
0.4925
0.4943
0.4957
0.4968
0.4977
0.4983
0.4988
0.04
0.0160
0.0557
0.0948
0.1331
0.1700
0.2054
0.2389
0.2704
0.2995
0.3264
0.3508
0.3729
0.3925
0.4099
0.4251
0.4382
0.4495
0.4591
0.4671
0.4738
0.4793
0.4838
0.4875
0.4904
0.4927
0.4945
0.4959
0.4969
0.4977
0.4984
0.4988
0.05
0.0199
0.0596
0.0987
0.1368
0.1736
0.2088
0.2422
0.2734
0.3023
0.3289
0.3531
0.3749
0.3944
0.4115
0.4265
0.4394
0.4505
0.4599
0.4678
0.4744
0.4798
0.4842
0.4878
0.4906
0.4929
0.4946
0.4960
0.4970
0.4978
0.4984
0.4989
0.06
0.0239
0.0636
0.1026
0.1406
0.1772
0.2123
0.2454
0.2764
0.3051
0.3315
0.3554
0.3770
0.3962
0.4131
0.4279
0.4406
0.4515
0.4608
0.4686
0.4750
0.4803
0.4846
0.4881
0.4909
0.4931
0.4948
0.4961
0.4971
0.4979
0.4985
0.4989
0.07
0.0279
0.0675
0.1064
0.1443
0.1808
0.2157
0.2486
0.2794
0.3078
0.3340
0.3577
0.3790
0.3980
0.4147
0.4292
0.4418
0.4525
0.4616
0.4693
0.4756
0.4808
0.4850
0.4884
0.4911
0.4932
0.4949
0.4962
0.4972
0.4979
0.4985
0.4989
0.08
0.0319
0.0714
0.1103
0.1480
0.1844
0.2190
0.2517
0.2823
0.3106
0.3365
0.3599
0.3810
0.3997
0.4162
0.4306
0.4429
0.4535
0.4625
0.4699
0.4761
0.4812
0.4854
0.4887
0.4913
0.4934
0.4951
0.4963
0.4973
0.4980
0.4986
0.4990
0.09
0.0359
0.0753
0.1141
0.1517
0.1879
0.2224
0.2549
0.2852
0.3133
0.3389
0.3621
0.3830
0.4015
0.4177
0.4319
0.4441
0.4545
0.4633
0.4706
0.4767
0.4817
0.4857
0.4890
0.4916
0.4936
0.4952
0.4964
0.4974
0.4981
0.4986
0.4990
Page 59
df\p
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
0.4
0.32492
0.288675
0.276671
0.270722
0.267181
0.264835
0.263167
0.261921
0.260955
0.260185
0.259556
0.259033
0.258591
0.258213
0.257885
0.257599
0.257347
0.257123
0.256923
0.256743
0.256580
0.256432
0.256297
0.256173
0.256060
0.255955
0.255858
0.255768
0.25
1.000000
0.816497
0.764892
0.740697
0.726687
0.717558
0.711142
0.706387
0.702722
0.699812
0.697445
0.695483
0.693829
0.692417
0.691197
0.690132
0.689195
0.688364
0.687621
0.686954
0.686352
0.685805
0.685306
0.684850
0.684430
0.684043
0.683685
0.683353
0.1
3.077684
1.885618
1.637744
1.533206
1.475884
1.439756
1.414924
1.396815
1.383029
1.372184
1.363430
1.356217
1.350171
1.345030
1.340606
1.336757
1.333379
1.330391
1.327728
1.325341
1.323188
1.321237
1.319460
1.317836
1.316345
1.314972
1.313703
1.312527
0.05
6.313752
2.919986
2.353363
2.131847
2.015048
1.943180
1.894579
1.859548
1.833113
1.812461
1.795885
1.782288
1.770933
1.761310
1.753050
1.745884
1.739607
1.734064
1.729133
1.724718
1.720743
1.717144
1.713872
1.710882
1.708141
1.705618
1.703288
1.701131
0.025
12.7062
4.30265
3.18245
2.77645
2.57058
2.44691
2.36462
2.30600
2.26216
2.22814
2.20099
2.17881
2.16037
2.14479
2.13145
2.11991
2.10982
2.10092
2.09302
2.08596
2.07961
2.07387
2.06866
2.06390
2.05954
2.05553
2.05183
2.04841
0.01
31.82052
6.96456
4.54070
3.74695
3.36493
3.14267
2.99795
2.89646
2.82144
2.76377
2.71808
2.68100
2.65031
2.62449
2.60248
2.58349
2.56693
2.55238
2.53948
2.52798
2.51765
2.50832
2.49987
2.49216
2.48511
2.47863
2.47266
2.46714
0.005
63.65674
9.92484
5.84091
4.60409
4.03214
3.70743
3.49948
3.35539
3.24984
3.16927
3.10581
3.05454
3.01228
2.97684
2.94671
2.92078
2.89823
2.87844
2.86093
2.84534
2.83136
2.81876
2.80734
2.79694
2.78744
2.77871
2.77068
2.76326
0.0005
636.6192
31.5991
12.924
8.6103
6.8688
5.9588
5.4079
5.0413
4.7809
4.5869
4.4370
4.3178
4.2208
4.1405
4.0728
4.0150
3.9651
3.9216
3.8834
3.8495
3.8193
3.7921
3.7676
3.7454
3.7251
3.7066
3.6896
3.6739
Page 60
29
30
inf
0.255684
0.255605
0.253347
0.683044
0.682756
0.67449
1.311434
1.310415
1.281552
1.699127
1.697261
1.644854
2.04523
2.04227
1.95996
2.46202
2.45726
2.32635
2.75639
2.75000
2.57583
3.6594
3.6460
3.2905
df\p
0.995
0.99
0.975
0.95
0.9
0.75
0.5
0.25
0.1
0.05
0.025
0.01
0.005
0.00004
0.00016
0.00098
0.00393
0.01579
0.10153
0.45494
1.32330
2.70554
3.84146
5.02389
6.63499
7.87944
0.01003
0.02010
0.05064
0.10259
0.21072
0.57536
1.38629
2.77259
4.60517
5.99146
7.37776
9.21034
10.5966
0.07172
0.11483
0.21580
0.35185
0.58437
1.21253
2.36597
4.10834
6.25139
7.81473
9.34849
11.3449
12.8382
0.20699
0.29711
0.48442
0.71072
1.06362
1.92256
3.35669
5.38527
7.77944
9.48773
11.1433
13.2767
14.8603
0.41174
0.55430
0.83121
1.14548
1.61031
2.67460
4.35146
6.62568
9.23636
11.0705
12.8325
15.0863
16.7496
0.67573
0.87209
1.23734
1.63538
2.20413
3.45460
5.34812
7.84080
10.6446
12.5916
14.4494
16.8119
18.5476
0.98926
1.23904
1.68987
2.16735
2.83311
4.25485
6.34581
9.03715
12.0170
14.0671
16.0128
18.4753
20.2777
1.34441
1.64650
2.17973
2.73264
3.48954
5.07064
7.34412
10.2189
13.3616
15.5073
17.5346
20.0902
21.9559
1.73493
2.08790
2.70039
3.32511
4.16816
5.89883
8.34283
11.3888
14.6837
16.9199
19.0228
21.6669
23.5894
10
2.15586
2.55821
3.24697
3.94030
4.86518
6.73720
9.34182
12.5489
15.9872
18.3079
20.4832
23.2093
25.1882
11
2.60322
3.05348
3.81575
4.57481
5.57778
7.58414
10.3410
13.7007
17.2750
19.6751
21.9201
24.7259
26.7569
12
3.07382
3.57057
4.40379
5.22603
6.30380
8.43842
11.3403
14.8454
18.5494
21.0261
23.3367
26.2179
28.2995
13
3.56503
4.10692
5.00875
5.89186
7.04150
9.29907
12.3398
15.9839
19.8119
22.3629
24.7356
27.6883
29.8195
14
4.07467
4.66043
5.62873
6.57063
7.78953
10.1653
13.3393
17.1169
21.0641
23.6848
26.1199
29.1412
31.3194
15
4.60092
5.22935
6.26214
7.26094
8.54676
11.0365
14.3389
18.2451
22.3071
24.9958
27.4884
30.5779
32.8013
16
5.14221
5.81221
6.90766
7.96165
9.31224
11.9122
15.3385
19.3689
23.5418
26.2962
28.8454
31.9999
34.2672
17
5.69722
6.40776
7.56419
8.67176
10.0852
12.7919
16.3382
20.4887
24.7690
27.5871
30.1919
33.4087
35.7185
18
6.2648
7.01491
8.23075
9.39046
10.8649
13.6753
17.3379
21.6049
25.9894
28.8693
31.5264
34.8053
37.1565
19
6.84397
7.63273
8.90652
10.1170
11.6509
14.5620
18.3377
22.7178
27.2036
30.1435
32.8523
36.1909
38.5823
20
7.43384
8.26040
9.59078
10.8508
12.4426
15.4518
19.3374
23.8277
28.4120
31.4104
34.1696
37.5662
39.9969
21
8.03365
8.89720
10.2829
11.5913
13.2396
16.3444
20.3372
24.9348
29.6151
32.6706
35.4789
38.9322
41.4011
22
8.64272
9.54249
10.9823
12.3380
14.0415
17.2396
21.3370
26.0393
30.8133
33.9244
36.7807
40.2894
42.7957
23
9.26042
10.1957
11.6886
13.0905
14.8480
18.1373
22.3369
27.1413
32.0069
35.1725
38.0756
41.6384
44.1813
24
9.88623
10.8564
12.4012
13.8484
15.6587
19.0373
23.3367
28.2412
33.1962
36.4159
39.3641
42.9798
45.5585
25
10.5197
11.5240
13.1197
14.6114
16.4734
19.9393
24.3366
29.3389
34.3816
37.6525
40.6465
44.3141
46.9279
Page 61
26
11.1602
12.1982
13.8439
15.3792
17.2919
20.8434
25.3365
30.4346
35.5632
38.8851
41.9232
45.6417
48.2899
27
11.8076
12.8785
14.5734
16.1514
18.1139
21.7494
26.3363
31.5284
36.7412
40.1133
43.1945
46.9629
49.6449
28
12.4613
13.5647
15.3079
16.9279
18.9392
22.6572
27.3362
32.6205
37.9159
41.3371
44.4608
48.2782
50.9934
29
13.1212
14.2565
16.0471
17.7084
19.7677
23.5666
28.3361
33.7109
39.0875
42.5579
45.7223
49.5879
52.3356
30
13.7867
14.9535
16.7908
18.4927
20.5992
24.4776
29.3360
34.7997
40.2560
43.7739
46.9792
50.8922
53.6729
Page 62
Page 63