Business Statistics

Level 3

Model Answers
Series 2 2008 (Code 3009)

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Business Statistics Level 3
Series 2 2008

How to use this booklet Model Answers have been developed by Education Development International plc (EDI) to offer additional information and guidance to Centres, teachers and candidates as they prepare for LCCI International Qualifications. The contents of this booklet are divided into 3 elements: (1) (2) Questions Model Answers – reproduced from the printed examination paper – summary of the main points that the Chief Examiner expected to see in the answers to each question in the examination paper, plus a fully worked example or sample answer (where applicable) – where appropriate, additional guidance relating to individual questions or to examination technique

(3)

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Business Statistics Level 3
Series 2 2008
QUESTION 1 When it is under control a process produces components whose weight is normally distributed with mean 505mm and standard deviation 2 mm. Random samples of 5 components are selected at intervals and the mean length of each sample is measured. Quality control procedures are used which set the warning limits at the 0.025 probability point and action limits at the 0.001 probability point. This means, for example, that the upper action limit is set so that the probability of the means exceeding the limit is 0.001. (a) (i) (ii) Construct a control chart to monitor the mean length of these components. The means of 8 samples were: 506.2, 504.9, 504.7, 504.4, 504.8, 504.2, 504.6, and 503.7 Plot these values on your control chart and comment. (4 marks) (b) If the process mean changed to 506 mm and the standard deviation remained at 2 mm, calculate the probability that the mean of a randomly selected sample of 5 items would lie outside the warning limits. (6 marks) (c) Give two business advantages of a good quality control scheme. (2 marks) (Total 20 marks) (8 marks)

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MODEL ANSWER TO QUESTION 1 (a) Warning Limits
2 5 x ± 1.96 σ n

505 ± 1.96

= 505 ± 1.96 x 0.89 = 505 ± 1.75 = 506.75 to 503.25
σ n

Action Limits

x ± 3.09

505 ± 3.09 x 0.89 = 505 ± 2.76 = 507.76 to 502.24

509.00 508.00 507.00 506.00 505.00 504.00 503.00 502.00 501.00 500.00 499.00 1 2 3 4 5 6 7 8

UAL UWL

LWL LAL

Comment: All the points lie within the upper and lower control limits and therefore the process appears to be in control. However, the data shows a downwards trend and action should be taken to prevent the process moving out of control.

(b)

z=

x−µ σ n

=

506.75 − 506 0.89

=

0.75 0.89

= 0.84

Probability = 0.201
z= x−µ σ n

=

503.25 − 506 0.89

=

− 2.75 0.89

= -3.09

Probability = 0.001 Answer = 0.201 + 0.001 = 0.202 (c) Reduction of waste and therefore costs. Improved ability to market the product and greater sales.

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QUESTION 2

The manufacturer of an electronic component has made certain claims about the life of the component. (a) A random sample of 12 of these components was selected and the components were tested to destruction. The lifetimes (in hours) were: 534 399 464 415 743 596 669 964 767 606 885 518 (12 marks) (b) The manufacturer claims the mean lifetime of the component is 700 hours. State the null hypothesis and the alternative hypothesis and use the confidence interval from part (a) to test whether there is evidence that the mean life of the components differs from 700 hours. (4 marks) (c) Explain what is meant by a type 2 error. State whether a type2 error may have occurred in the conclusion you drew in part (b). (4 marks)
(Total 20 marks)

Set up a 95% confidence interval for the mean life of this component.

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MODEL ANSWER TO QUESTION 2

(a) x 534 399 464 415 743 596 669 964 767 606 885 518 Σx=7560
∑x n

x2 285156 159201 215296 172225 552049 355216 447561 929296 588289 367236 783225 268324 Σx2 = 5123074

_ x-x -96 -231 -166 -215 113 -34 39 334 137 -24 255 -112

_ (x-x)2 9216 53361 27556 46225 12769 1156 1521 111556 18769 576 65025 12544
∑ x − x = 360274

(

)

2

x=

=

7560 12

= 630 hours

St deviation =

∑( x − x ) n −1

2

=

360274 12 − 1

or

sd =

∑x

∑x −  n  n 
2

2

180.97 or 181 hours
sd = 5123074 12 − (630 )
2

For a 95% Confidence interval v n-1 = 11, t = ± 2.20
ci = x ± 2.20 sd n

= 630 ± 2.20

181 12

= 630 ± 115.0

ci = 515 to 745 hours

(b) Null hypothesis: the mean life of the component does not differ from 700 hours. Alternative hypothesis: the mean life of the component does differ from 700 hours. Using the 0.05 significance level the interval is 515 to 745. Conclusion: The claimed value for the mean of 700 hours lies within the interval 515 to 745 hours. Accept the null hypothesis the mean life of the component does not differ from 700 hours. (c) A type 2 error is when the null hypothesis is accepted when it should have been rejected. A type 2 error might have been made as the null hypothesis was not rejected.

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QUESTION 3

(a) Outline the main uses of index numbers from the point of view of a business person. The following data was collected from the wages department of a company.
Year 1 Total wage cost (£000) 800 3408 837 1400

(4 marks)

Department Electrical Assembly Testing Despatch (b) (i) (ii)

Number of employees 50 240 90 200

Number of employees 60 120 100 420

Year 4 Total wage cost (£000) 1200 1800 1000 3780

Calculate a Laspeyres index number for the increase in wages from year 1 to year 4. Calculate a Paasche index number for the increase in wages from year 1 to year 4. (10 marks) (6 marks)
(Total 20 marks)

(c) Contrast the use of Laspeyres and Paasche index numbers.

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MODEL ANSWER TO QUESTION 3

(a) Index numbers which are likely to be of most use to a business person are for the costs of raw materials, which indicate how costs will have risen, wages to compare the position of the firm’s workers with others, and a general price index such as the Retail Price Index which would indicate possible future wage pressures. (b) Department Electrical Assembly Testing Despatch Year 1 Number of Total employees wage cost (£000) 50 800 240 3408 90 837 200 1400 6445 Σ p1q1
p1q4

Year 4 Number of Total employees wage cost (£000) 60 1200 120 1800 100 1000 420 3780 7780 Σ p4q4

Yr1 Wage w1 16.0 14.2 9.3 7.0

Yr 4 Wage w4 20.0 15.0 10.0 9.0

p4q1

1000 36000 900 1800
7300 Σ p4q 1

960 1704 930 2940
6534 Σ p1q4

L=

∑ p 4 q1 ∑ p1q1

x 100 =

7300 6445

x 100 = 113.3

P=

∑ p4 q 4

∑ p1q 4

x 100 =

7780 6534

x 100 = 119.1

(c) The Paasche index requires the actual weights to be found for each year of the series. This can be expensive compared with the Laspeyres index which requires only the base year weights to be found. The denominator of the formula for the Paasche index needs to be recalculated for each period. The Laspeyres denominator remains the same throughout the life of the index series. The different years of a Laspeyres index number can be directly compared with each other whereas with the Paasche index the current year can only be compared with the base year.

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QUESTION 4

A company uses 2 procedures for assessing the suitability of staff for promotion: a test and an interview by a panel of three managers. The following data show the results of the promotion test and the scores the three managers gave each member of staff:
Candidate A B C D E F G H I J Test 74 92 58 71 86 65 78 72 63 60 Manager X 67 75 69 75 88 68 71 72 68 72 Manager Y 75 68 64 64 74 72 73 68 65 58 Manager Z 75 91 77 59 94 75 81 62 65 66

(a) Total the scores given by the three managers and find the correlation coefficient between the test results and the managers’ total scores. Comment on your answer. (12 marks) (b) Test whether the correlation coefficient differs from zero. (6 marks)

(c) The correlation coefficients between the test results and the scores of the individual managers were 0.61, 0.57 and 0.68 respectively. What is the implication of these results for the promotion procedure? (2 marks)
(Total 20 marks)

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MODEL ANSWER TO QUESTION 4

(a)

Candidate A B C D E F G H I J Totals
n
2

Test x 74 92 58 71 86 65 78 72 63 60
719

Total score y 217 234 210 198 256 215 225 202 198 196
2151

x2 5476 8464 3364 5041 7396 4225 6084 5184 3969 3600
52803

y2 47089 54756 44100 39204 65536 46225 50625 40804 39204 38416
465959

xy 16058 21528 12180 14058 22016 13975 17550 14544 12474 11760
156143

r =

∑ xy − (∑ x )(∑ y ) (n∑ x − (∑ x ) )(n∑ y − (∑ y ) )
2 2 2

r =

(10x52803 − 719 )(10x465959 − 2151 )
2 2

10x156143 − 719x2151

r =

(11069 )(32789 )

14861

= 0.78

Comment: There is strong positive association between the two variables. (b) The correlation coefficient does not differ significantly from zero. Alternative hypothesis: The correlation coefficient does differ significantly from zero. Degrees of freedom = n-2 = 10-2 = 8 Critical value of t0.05/0.01 = 2.31/3.36
t= r n−2

1− r

2

t=

0.78 10 − 2 1 − (0.78)
2

= 3.53

Conclusions: The calculated value of t is greater than the critical t value reject the null hypothesis. The correlation coefficient differs from zero. (c) It is better to take the combined scores of the managers into account rather than those of an individual manager.

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QUESTION 5

(a) Explain how probabilities are determined using the classical and empirical approaches. Give a business example of each approach. (6 marks) (b) An investment advisor considers the probability of a rise in the price of three shares in one month’s time. The following table shows the probability of each share rising – where each share acts independently of each other.
Share Probability of a rise in one month 0.4 0.7 0.6

A B C

Find the probability that in one month’s time: (i) (ii) All three share prices rise. None of the three share prices rise. (10 marks) (c) If one of the share prices has risen what is the probability it is share B? (4 marks)
(Total 20 marks)

(iii) Exactly one of the three share prices rises.

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MODEL ANSWER TO QUESTION 5

(a) Classical approach to probability is where there are a set known number of outcomes which must occur with given probabilities. A casino where the probability of certain cards appearing is known. This allows the owners to set the odds offered for winning combination. Empirical approach to probability occurs when a process or number of events take place which can have different outcomes. For example, an oil exploration company boring test wells and from 100 wells bored 87 are dry. (b) (i) (ii) Probability all rise 0.4 x 0.7 x 0.6 = 0.168 None increase 0.6 x 0.3 x 0.4 = 0.072

(iii) 0.4 x 0.3 x 0.4 = 0.048 0.6 x 0.7 x 0.4 = 0.168 0.6 x 0.3 x 0.6 = 0.108 0.324 (c) Probability B has risen Probability 1 share has risen 0.168 = 0.519 0.324

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QUESTION 6

(a) Explain the difference between a one tail and a two tail test.

(4 marks)

The Accounts Department of a manufacturing company keeps a record of the debts of its customers. In 2000, from a random sample of 200 customers, 48 owed more than £1000. In 2007, from a random sample of 300 customers, 93 customers owed more than £1000. (b) Test whether the proportion owing more than £1000 has changed between 2000 and 2007. (12 marks) (c) Would your conclusion in (b) have been different if a one tail test had been used? Justify your answer. (4 marks)
(Total 20 marks)

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MODEL ANSWER TO QUESTION 6

(a) A one tail test tests the direction of change either greater than or less than. A two tail test tests there is change both greater and less than. (b) Null hypothesis: there is no difference in the proportion of customers owing more than £1000. Alternative hypothesis: there is a difference in the proportion of customers owing more than £1000. p1 = 48/200 =0.24, p2 = 93/300 = 0.31 Critical z value for 0.05 significance level = ± 1.96
z= p1 − p2 p(1 − p ) 

1  n1

+

 n2  

1 

where p =

n1p1 + n2 p2 n1 + n2

Pooled value of p = (48+93)/(200+300) = 0.282
0.24 − 0.31 1   1 + 0.282(1 − 0.282 )   200 300 

=

0.07 0.202476 × 0.00833

= 1.704

Conclusions: There is insufficient evidence to reject the null hypothesis. There is no difference in the proportion owing more than £1000. (c) A one tailed test would use a Z value of +1.64. The results would still have been to reject the null hypothesis and accept the alternative hypothesis, there is a difference in the proportion of customers owing more than £1000.

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QUESTION 7

(a) Explain the circumstances in which a chi-squared test can be used.

(4 marks)

(b) A car manufacturer sells its product in 3 sales regions, Europe, USA and Asia. A random sample of 500 vehicles sold, showed the following distribution of sales region and engine capacity.
Region USA 20 120 90

Engine Capacity Under 1000cc 1000cc and under 2000cc Over 2000cc

Europe 40 100 30

Asia 60 30 10 (12 marks)

Test whether there is any association between sales region and engine capacity.

When comparing the current proportion of vehicles in each engine category with 5 years ago a statistical test gives a chi-squared value of 6.83. Test whether the proportion of vehicles in each category has changed over the past five years. (4 marks)
(Total 20 marks)

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MODEL ANSWER TO QUESTION 7

(a) A chi-squared test can be used to measure association where a contingency table is presented. It can also be used to test for randomness or goodness of fit to a specified distribution. (b) Null hypothesis: There is no association between Sales Region and Engine Capacity. Alternative hypothesis: There is association between Sales Region and Engine Capacity Degrees of freedom (R-1)(C-1) = (3-1)(3-1) = 4 Critical chi-squared = 9.49/13.28 Observed Frequencies
Engine Capacity Under 1000cc 1000cc and under 2000cc Over 2000cc Europe USA Asia

Expected frequencies

40

20

60

40.8

55.2

24

100

120

30

85

115

50

30

90

10

44.2

59.8

26

Contributions to chi-squared 0.015686 2.647059 4.561991 22.44638 0.217391 15.25151 54 8 9.8461538 ΣX2

116.99

Conclusions: The calculated value of chi-squared is greater than the critical value of chi-squared at both the 0.05 and the 0.01 significance level. Reject the null hypothesis there is strong evidence that Region and Engine Capacity are associated. (c) Null hypothesis: there has been no change in the proportion of vehicles in each engine category. Alternative hypothesis: there has been a change in the proportion of vehicles in each engine category.
Critical X2 = Degrees of freedom = n-1 = 3-1 = 2 Critical X2 = 5.99/9.21

Conclusions: The calculated value of X2 is greater than the critical value at the 0.05 significance level, therefore there is evidence to show there has been a change in the proportion of vehicles in each engine capacity. However the calculated value of X2 is less than the critical value of X2 at the 0.01 level of significance therefore there is insufficient evidence to reject the null hypothesis that there has been no change.

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QUESTION 8

(a) Briefly describe the components of a time series.

(4 marks)

The following table shows the daily sales over a three week period, in £, of a small store.
Monday 476 526 559 Tuesday 694 734 797 Wednesday 767 812 851 Thursday 775 829 895 Friday 651 702 745 Saturday 437 569 618 Sunday 495 589 754

Week 1 Week 2 Week 3

(b) Use the method of moving averages to find the trend and the additive model to find the seasonal variations. (10 marks) (c) Predict the level of sales on Monday and Tuesday of week 4 and comment upon the likely accuracy of your answer. (6 marks)
(Total 20 marks)

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MODEL ANSWER TO QUESTION 8

(a) Trend: the long term direction of change. Cyclical: a regular up and down pattern that repeats over a number of years. Seasonal variation: a regular up and down pattern that repeats over a year. Residual/random variation odd patterns of the data that have no demonstrable cause. (b)
Sales Moving Total Moving Average/ Trend Differences

476 694 767 775 651 437 495 526 734 812 829 702 569 589 559 797 851 895 745 618 754 4295 4345 4385 4430 4484 4535 4667 4761 4794 4857 4896 4962 5005 5054 5219

613.6 620.7 626.4 632.9 640.6 647.9 666.7 680.1 684.9 693.9 699.4 708.9 715.0 722.0 745.6

161.4 30.3 -189.4 -137.9 -114.6 86.1 145.3 148.9 17.1 -124.9 -110.4 -149.9 82.0 129.0 149.4

Monday Tuesday Wednesday Thursday

Friday

Saturday Sunday

161.4 -114.6 -149.9
Total Average SV

30.3 17.1 47.4 23.7

-189.4 -124.9 -314.3 -157.15

-137.9 -110.4 -248.3 -124.15

86.1 82 168.1 84.05

145.3 129 274.3 137.15

148.9 149.4 459.7 153.233

-264.5 -132.25

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MODEL ANSWER TO QUESTION 8 CONTINUED

(c) Forecast Increase per day Tn-T1 = 745.6-613.6 = 9.43 n-1 15-1
Trend Forecast ASV Forecast

Monday Tuesday

745.6 + (4 x 9.43) = 783.31 - 132.25 = 651.06 745.6 + (5 x 9.43) = 792.74 + 84.05 = 876.79

This is based on extrapolation and therefore the forecasts can be unreliable. However, as the forecast is only for one period ahead the results are likely to be reasonably accurate.

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