The Association of Business Executives

QCF
Quantitative Methods for Business
Management
Suggested Answers

Unit Title: Quantitative Methods for Business Management
Unit Code: 5QMBM
QCF Level: 5
Session: December 2012


STRUCTURE OF PAPER: Answer BOTH sections
SECTION A: Answer ALL EIGHT questions Q1Q8 5 marks
each
Maximum marks for Section A: 40 marks
SECTION B: Answer ANY FOUR questions from: Q9Q13 15 marks
each
Maximum marks for Section B: 60 marks
TOTAL MARKS AVAILABLE FOR THE PAPER 100 marks



SECTION A
Candidates must answer ALL EIGHT questions in this section.
Section A is worth 40% of the total marks available for the paper.

Question 1

Q1


Distinguish between a simple random sample and a cluster sample.
Simple random samples and cluster samples are examples of probability samples.

In a simple random sample, every item in the population has an equal chance of being
selected.

In a cluster sample, the population is divided into clusters. Then clusters are randomly
selected and a sample is collected at random from each cluster.

In general, cluster sampling is less costly and time-consuming than simple random
sampling.
Total Maximum Marks for Q1 5 marks



Question 2

Q2


The following measurements represent the actual weights of flour sold in ten randomly
selected bags:

2.7 2.9 3.3 3.0 2.9 3.0 2.6 2.9 3.0 2.7 (Kg)

Calculate the arithmetic mean and standard deviation of this data.
Mean = 29 / 10 = 2.9 kg


19 . 0
10
29
10
46 . 84
2
=
|
.
|

\
|
= SD


[Also accept SD = 0.2, obtained using the (n-1) formula]
Total Maximum Marks for Q2 5 marks




Question 3

Q3
(a)

Define the standard error of the mean.
The standard error of the mean is the standard deviation of the sampling distribution of
the mean. For a large population, the standard error is the population standard deviation
divided by the sample size.
Maximum Marks for (a) 3 marks
Q3
(b)

Weekly household incomes in a country have a standard deviation equal to 1,500.
Calculate the standard error of the mean for random samples of 144 households
125
144
1500
= = SE



Maximum Marks for (b) 2 marks
Total Maximum Marks for Q3 5 marks



Question 4

Q4
(a)

Find the area under the standard normal curve between z
1
= -1 and z
2
= 2.
Area between z
1
= -1 and z
2
= 2 is:

1 (0.02275 + 0.1587) = 0.81855
Maximum Marks for (a) 3 marks
Q4
(b)

If the area under the standard normal curve to the left of z
3
is 0.0344, find the value of z
3
.
From the table, the area to the right of z = 1.82 is 0.0344.

So z
3
must be equal to -1.82.
Maximum Marks for (b) 2 marks
Total Maximum Marks for Q4 5 marks
Question 5

Q5


Fifty per cent of the banking executives in a country read the Financial News. If four
banking executives are chosen at random, use the binomial distribution to calculate the
probability that at least 2 of them read the Financial News.
p = 0.5, q = 0.5, n = 4

P(0) = (0.5)
4
= 0.0625
P(1) = 4 0. 5 (0.5)
3
= 0.25



P(at least 2) = 1 - (0.0625 + 0.25) = 0.6875
Total Maximum Marks for Q5 5 marks



Question 6

Q6


Change the base of the following index number series from 2009 to 2006:


Year 2006 2007 2008 2009 2010 2011
Index 85.6 94.5 97.0 100.0 105.0 110.0
To change the base, all index numbers must be multiplied by 100/85.6.

This gives:

100.0, 110.4, 113.3, 116.8, 122.7, 128.5
Total Maximum Marks for Q6 5 marks



Question 7

In the following set of data, y represents ten companies annual sales (in million) and x
represents the companies annual marketing budgets as a percentage of total expenses (%).

y 3.5 5 15 10 25 4 8 10 5 12
x 2 4 6 5 5 7 6 6 4 6
Q7

Plot a scatter diagram of this data on the graph paper at the front of your answer book,
and comment on the likely relationship between y and x.




The points are quite widely scattered, so there appears to be a very weak positive
relationship between y and x.

Total Maximum Marks for Q7 5 marks




Question 8

Q8


A firm produces computers. It incurs fixed costs of 1,600,000 per month and variable
cost of 240 per computer. It sells its product at a price of 400 per unit, regardless of
the number of units sold.

If the firm is making a loss of 320,000 per month, calculate the increase in production
that would be required to break even.
For a loss of 320,000:
400Q 240Q 1600000 = -320000
160Q = 1280000
Q = 8000 computers
For breakeven:
160Q 1600000 = 0
160Q = 1600000
Q = 10000 computers

An increase in production of 2,000 computers is required.
Total Maximum Marks for Q8 5 marks




SECTION B
Candidates must answer ANY FOUR questions from this section
Each question carries 15 marks.
Section B is worth 60% of the total marks available for the paper.

Question 9

The mean and median values of the annual bonuses earned by a sample of 1,000 bank employees in
a country are 3,500 and 1,200 respectively. The standard deviation is 4,000.
Q9
(a)

Calculate the coefficient of skewness and comment on the result.
Skew = (3 (3500 1200)) / 4000 = 1.725

This represents a high degree of positive skew (i.e. a long tail to the right).
Maximum Marks for (a) 5 marks
Q9
(b)

Calculate 90 and 95 per cent confidence intervals for the population mean.
n = 1000, Mean = 3,500, SD = 4,000

At the 90% confidence level: 08 . 208 3500 )
1000
4000
645 . 1 ( 3500 = =


At the 95% confidence level: 92 . 247 3500 )
1000
4000
96 . 1 ( 3500 = =
Maximum Marks for (b) 5 marks


Q9
(c)

Test the claim made by the countrys banking association that bank employees earn on
average 3,000 per year in bonuses. Use a 5% level of significance.
H
0
: 3000 =
H
1
: 3000 =

At the 5% level, the critical value of z in a two-tailed test is 1.96.

95 . 3
1000
4000
3000 3500
=

= z

Since 3.95 > 1.96, the null hypothesis can be rejected. The evidence
does not support the claim that bank employees average bonus is
3,000.

Maximum Marks for (c) 5 marks
Total Maximum Marks for Q9
15
marks



Question 10

To investigate the relationship between profitability and the age of a firm, a sample of
100 firms was taken and the following sums were calculated from the sample data:

x = 1,310
x
2
= 28,000
y = 5,700
y
2
= 927,000
xy = 65,500

where y represents annual profit (in 000) and x represents the age of each firm (in years).
Q10
(a)

Use this sample information to calculate the mean and standard deviation of x and y.
1 . 13
100
1310
= = x

57
100
5700
= = y

6 . 77 57
100
927000
41 . 10 1 . 13
100
28000
2
2
= =
= =
y
x
o
o



(Also accept 10.46 and 77.99 obtained using the (n-1) formula)
Maximum Marks for (a) 5 marks


Q10
(b)

Taking annual profit (y) as the dependent variable and age (x) as the independent
variable, calculate the equation of the least-squares regression line.

1 . 68 ) 1 . 13 846 . 0 ( 57
846 . 0
1310 ) 28000 100 (
) 5700 1310 ( ) 65500 100 (
2
= =
=


=
a
b



So the equation is: y = 68.1 - 0.846x

Maximum Marks for (b) 5 marks
Q10
(c)

Calculate the Pearson correlation coefficient between the two variables and
comment on the result.
113 . 0
6 . 77
41 . 10
846 . 0 = = R


This represents a very low degree of negative correlation.

Maximum Marks for (c) 5 marks
Total Maximum Marks for Q10
15
marks




Question 11

A companys sales are shown quarterly over three years in the following table:

Year Qtr Time
Sales
(000)

2009 1 1 50
2 2 22
3 3 36
4 4 10

2010 1 5 76
2 6 45
3 7 65
4 8 24

2011 1 9 85
2 10 60
3 11 84
4 12 40
Q11
(a)

Plot a time-series graph of this data on graph paper at the front of your answer book,
and comment on the trend and seasonal pattern over the three years.



There is an upward trend and a clear seasonal pattern, with higher sales in quarters 1
and 3, and the lowest sales in quarter 4.
Maximum Marks for (a) 5 marks


Q11
(b)

A linear trend for this data is given by the equation y = 30 + 3t, where y represents the
trend values for each quarter and t represents time (from 1 to 12). Use this trend
equation and the additive model to estimate the seasonal factors in each quarter (to two
decimal places).
The trend values from the equation are:

33, 36, 39, 42, 45, 48, 51, 54, 57, 60, 63, 66

The seasonal factors are found by subtracting these trend values from the original sales
data and then averaging over each quarter:











So the seasonal factors to 2 decimal places are 25.08, -5.92, 10.42, -29.58
Q1 Q2 Q3 Q4

17 -14 -3 -32

31 -3 14 -30

28 0 21 -26

25.333 -5.667 10.667 -29.333 Sum = 1
25.083 -5.917 10.417 -29.583 Adjusted

Maximum Marks for (b) 5 marks
Q11
(c)

Use your results from part (b) to forecast the companys sales in the first quarter of 2012
(to the nearest whole number). Comment on the likely accuracy of your forecast.
The equation gives the estimated trend value for the first quarter
of 2012 as 69. The sales forecast for the first quarter is:

69 + 25.08 = 94.08 (94)
The forecast may not be accurate because it is based on a very short time series of only
three years, and because other factors that are likely to influence the companys sales
are not taken into account (e.g. household incomes, interest rates). Also, the possibility
of cyclical variations is ignored.
Maximum Marks for (c) 5 marks
Total Maximum Marks for Q11
15
marks



Question 12
Q12
(a)

Explain the difference between one-tailed and two-tailed hypothesis tests.
In hypothesis testing, a two-tailed test is one in which the null hypothesis can be rejected
by an extreme result in either direction, while a one-tailed test is one in which the null
hypothesis can be rejected by an extreme result in only one direction.
Maximum Marks for (a) 5 marks
Q12
(b)

A pharmaceutical company has produced a new drug for the treatment of arthritis
intended to provide faster pain relief to more patients than traditional drugs. Of 500
patients treated with traditional drugs, 260 reported faster pain relief. Of 400 patients
treated with the new drug, 250 reported faster pain relief. You are asked to test the
manufacturers claim that the new drug provides faster pain relief than traditional
drugs.
(i) State the null and alternative hypotheses and determine the critical value of z for
a one-tailed test at the 5% level of significance.
(ii) Calculate the test statistic and draw an appropriate conclusion.
(i) H
0
: t
1
= t
2

H
1
: t
1
> t
2

(where the subscript 1 refers to the new drug and the subscript 2 refers to
traditional drugs).

This is a one-tailed test, so the critical value at the 5% level is +1.645.

(ii) p
1
= 0.625
p
2
= 0.52


5667 . 0
500 400
) 52 . 0 500 ( ) 625 . 0 400 (
=
+
+
= p

And therefore:


16 . 3
500
1
400
1
4333 . 0 5667 . 0
52 . 0 625 . 0
=
|
.
|

\
|
+

= z

We can reject the null hypothesis at the 5% level. The evidence suggests that the
new drug offers significantly faster pain relief than traditional drugs.
Maximum Marks for (b) 10 marks
Total Maximum Marks for Q12 15 marks


Question 13

There is a 0.5 probability that a company will restructure its management team during the coming
year. However, the company must decide now which of three business strategies (A, B or C) to
adopt.
A market research study has estimated the probabilities of different levels of long-run profit or loss
for the three strategies, recognising that the estimated probabilities for Strategy C depend on
whether the proposed management re-structuring occurs or not. [The estimated probabilities for
Strategies A and B are assumed to be unaffected by the re-structuring.]
The market research results are shown below:
Profit/Loss Strategy A Strategy B
Strategy C
without
re-structuring
Strategy C
with re-
structuring
500,000 0.6 0.4 0 0.6
200,000 0.3 0.6 0.9 0.4
-150,000 0.1 0 0.1 0
Q13
(a)

Construct a decision tree for this problem.
The required decision tree is as follows:




Maximum Marks for (a) 8 marks


Q13
(b)

Calculate the expected monetary values for each strategy and advise the firm which
strategy to adopt.
The expected values of the firms profits associated with each strategy are:
Strategy A
Expected profit = (0.6 500000) + (0.3 200000) (0.1 150000) = 345,000

Strategy B
Expected profit = (0.4 500,000) + (0.6 200000) = 320,000

Strategy C
Expected profit = 0.5((0.9 200,000) - (0.1 150000))
+ 0.5((0.6 500,000) + (0.4 200000)) = 272,500

So to maximise profit, the firm should be advised to adopt Strategy A.
Maximum Marks for (b) 7 marks
Total Maximum Marks for Q13
15
marks