BUSINESS MATHEMATICS &

QUANTITATIVE METHODS
FORMATION 1 EXAMINATION - APRIL 2005

NOTES
Answer 5 questions
(Only the first 5 questions answered will be marked)
All questions carry equal marks.

TIME ALLOWED:
Three hours and 10 minutes to read the paper.

INSTRUCTIONS:
During the reading time you may write notes on the examination paper but you may not commence
writing in your answer book.

Marks for each question are shown. The pass mark required is 50% in total over the whole paper.

Start your answer to each question on a new page.

You are reminded that candidates are expected to pay particular attention to their communication skills
and care must be taken regarding the format and literacy of the solutions. The marking system will
take into account the content of the candidates' answers and the extent to which answers are
supported with relevant legislation, case law or examples where appropriate.

The Institute of Certified Public Accountants in Ireland, 9 Ely Place, Dublin 2.

 THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

BUSINESS MATHEMATICS &

QUANTITATIVE METHODS
FORMATION 1 EXAMINATION - APRIL 2005

Time Allowed: 3 hours and 10 minutes to read the paper Answer 5 questions
Only the first five questions answered will be marked.
All questions carry equal marks.

1. The Superior Products company is purchasing a digital production machine. The cost accountant has received the
following quotations from the BIA financial services company. You propose to use the Net Present Value method to
assess the alternative proposals which are set out below. The machine is expected to have a life of 8 years.

(i) Rent the machine for €120,000 pa payable in advance.

(ii) Hire Purchase of the machine with a deposit of €150,000 and 7 equal annual payments of €100,000. At the
end of 8 years the machine is owned by the company and sold for €50,000
(iii) Purchase the machine for €500,000 with a service contract of €40,000 p.a., payable in advance. At the end
of 8 years the machine will be sold for €50,000.

Recommend the most appropriate option to the company using a cost of capital of 14%.

[Total 20 Marks]

2. Trainees in the production department of DIB Ltd. have recently undergone professional examinations. The
company has received the distribution of examination results which are set out below.

Marks No. of Trainees

30 and less than 40 2

40 and less than 50 5
50 and less than 60 7
60 and less than 70 13
70 and less than 80 15
80 and less than 90 5
90 and less than 100 3

You are asked to provide the following information:

(i) The mean and the median marks. (10 Marks)

(ii) Explain what the values calculated in (i) indicate about the distribution of marks, particularly with regard to the
difference between the mean and median values.
(10 Marks)

[Total 20 Marks]

1
3. The New Tyre Company has developed a new radial tyre supported by steel belts that will be sold through a chain
of discount garages. Since this is a new tyre NTC considers that a guarantee offered with the tyre will aid its
marketing. To support this you are asked to provide information on the number of miles the tyre will last. From road
tests, NTC has estimated the mean tyre mileage at 36,500 miles and the standard deviation at 5,000 miles. The
data collected indicates a Normal distribution.

(i) Estimate the percentage of the tyres that last more than 40,000 miles. (8 Marks)

(ii) Estimate the guaranteed mileage if NTC does not want more than 10% to be eligible for the guarantee.
(8 Marks)

(iii) Briefly describe the principles used in the above calculations. (4 Marks)

[Total 20 Marks]

4. A large multinational food company locates its fast-food outlets in areas where it estimates the youth population will
provide adequate sales. The following table provides an estimate of the local population and quarterly sales for 10
restaurants.

Restaurant Population (000s) Quarterly Sales (€000)

1 2 58
2 6 105
3 8 88
4 8 118
5 12 117
6 16 137
7 20 157
8 20 169
9 22 149
10 26 202

You are required to:

(i) Draw a scatter diagram as a preliminary step in estimating the form of regression equation.
(4 Marks)

(ii) Derive the regression between the variables and position the regression line on the scatter diagram.
(8 Marks)

(iii) A further restaurant will be located in an area with a youth population of 21,000. Predict the quarterly sales
for this restaurant.
( 8 Marks)

[Total 20 Marks]

2
5. Constructor Ltd. is one of the major house building companies in Leinster. Its records show that it has doubled its
construction programme of houses over the past 4 years with the usual peaks and valleys over time. The data from
2001 to 2004 is shown in the table below which shows the number of houses (in thousands) in each quarter over
the four year period.

Quarter

Year 1 2 3 4
2001 16 23 28.6 27.1
2002 23.1 29.3 32.6 28.9
2003 23.6 29.1 32.4 29.6
2004 25.5 33.7 39.0 35.0

The MD asks you to prepare a report containing the following analyses.

(i) Plot the trend in the data using centred moving averages. (10 Marks)

(ii) Explain how this process smoothes the data by isolating the trend and cyclical variations. (10 Marks)

[Total 20 Marks]

6. As the investment adviser to CPA accounting you have been asked to deal with a wide range of problems. A number
of the problems are set out below. Provide detailed solutions to the following:

(i) A client wishes to repay a mortgage at €8,000 per year for 5 years at an interest rate of 12%. Calculate the
level of mortgage required.
(6 Marks)

(ii) DIB Ltd produces batteries at a variable cost of €5 per unit and fixed costs of €20,000. The selling price per
unit is €15. Write an equation to represent the company s costs and calculate the number of units required
to make a profit of €8,000.
(6 Marks)

(iii) In (ii) above the following sample data was extracted from the battery production line. Sample mean = 950kg;
sample standard deviation = 15kg; sample size = 36. Calculate the 95% confidence limits.
(8 Marks)

[Total 20 Marks]

END OF PAPER

3
Suggested Solutions

BUSINESS MATHEMATICS &

QUANTITATIVE METHODS
FORMATION 1 EXAMINATION - APRIL 2005

Solution 1.
Net Present Value of Proposals. In all three cases the payments for years 1 to 7 can be treated as an annuity

(i) Rental. The rent is payable in advance.

Year 0 1-7 Total

Cash Flow (€120,000) (€120,000)
Discount Factor 1 4.288
NPV (€120,000) (€514,560) (€634,560)

(ii) Hire Purchase. The deposit is paid in advance.

Year 0 1-7 8 Total

Cash Flow (€150,000) (€100,000) €50,000
Discount Factor 1 4.288 0.351
NPV (€150,000) (€428,800) €17,550 (€561,250)

(iii) Purchase. Cash payment and one service fee is paid in advance.

Year 0 1-7 8 Total

Cash Flow (€500,000)

(€40,000) (€40,000) €50,000

Discount Factor 1 4.288 0.351

NPV (€540,000) (€171,520) €17,550 (€693,970)

Due to the lower cash out-flow, the hire-purchase option provides the best investment opportunity for the
company. This reinforces the principle of net present value — if payments can be deferred over a longer period,
the discounted cash flow is of greater benefit than paying cash in current terms.

4
Solution 2.
(i) The mean and median. Assuming that the data is continuous gives the mid points in the table.

Class f Cum x fx
Boundaries freq
30 — 40 2 2 35 70
40 — 50 5 7 45 225
50 — 60 7 14 55 385
60 — 70 13 27 65 845
70 — 80 15 42 75 1125
80 — 90 5 47 85 425
90 — 100 3 50 95 285
50 3360

Mean = x = ∑fx = 3360 = 67.2

∑f 50

Median = Lm + {N/2 - Fm-1} x Cm

{ fm }

where

Lm = lower boundary of median class (60 — 70)

Fm-1 = cumulative frequency of class prior to median class (14)
Fm = frequency of median class (13)
Cm = median class width (10), N = ∑f = 50

Therefore, median = 60 + { 51 - 14} x 10

2
13

= 68.85.

(ii) The median has distinct advantages over the mean particularly in open ended distributions. The mean is generally
used instead of the median especially if there is not much difference between them. The difference between them
depends on the skewness of the distribution. The median splits the area under the frequency curve into two halves.
If the distribution is symmetrical, then the mean and median will coincide. With a negatively skewed distribution the
median exceeds the mean and with a positively skewed distribution the mean exceeds the median. In this case the
median is greater than the mean. The distribution therefore has a negative skew. This demonstrates that there is a
greater spread of marks amongst the trainees at the lower end of the scale.

5
Solution 3.
(i) At x = 40,000, z = x - µ where µ = 36,500, σ = 5,000
σ

z = 40,000 - 36,500
5000
= 0.70.

A Value of x = 40,000 on the Normal distribution corresponds to a value of z = 0.7 on the standard normal distribution.
From the tables the area between the mean and z = 0.70 is 0.2580. Thus 0.5000 - 0.2580 = 0.2420 is the probability
that it will exceed 40,000 miles. That is 24.2% of the tyres will exceed 40,000 miles. The appropriate diagram is shown
below.
(σ) = 5,000

P(x ‡ 40,000)
P = 0.2580

Prob µ = 36,500 40,000 Xi

0 0.5

0 0.7 Z

(ii) According to the diagram below, 40% of the area must be between the mean and the guaranteed mileage.

(σ) = 5,000
10% of tyres eligible
for discount

Prob µ = 36,500 Xi

Guaranteed mileage

0.4000, from the tables, is approximately 1.28 (0.3997) standard deviations below the mean, that is Z = - 1.28.

To find the corresponding mileage z = x - µ = -1.28

σ
x - µ = - 1.28σ

x = - 1.28σ + µ,

with µ = 36,500 and σ = 5,000

x = 36,500 - 1.28 (5000) = 30,100.

Thus a guarantee of 30,100 miles will meet the requirement that 10% of the tyres will be eligible for the guarantee.

6
(iii) The normal distribution plays an important role in business applications since many business generate random
variables with probability distributions that are well approximated by a normal distribution. It is used to detect
disagreement between a set of data and the assumption of normality. It is perfectly symmetrical about its mean µ.
It is defined as a normal distribution with µ = 0 and σ = 1. A random variable with a standard normal distribution is
denoted by z and can be read from tables to find probabilities. To apply the tables to a normal random variable (x)
we must first convert the value of x to a z-score. The population z-score for a measurement is defined as the
distance between the measurement and the population mean divided by the population standard deviation. Thus
the z-score gives the distance between a measurement and the mean in units equal to the standard deviation. That
is z is a standard normal random variable such that z = x - µ
σ

Therefore, all probabilities associated with standard normal random variables can be depicted as areas under the
standard normal curve.

Solution 4.
(i)
Restaurant Population Quarterly Sales
(000s) x (€000) y
1 2 58
2 6 105
3 8 88
4 8 118
5 12 117
6 16 137
7 20 157
8 20 169
9 22 149
10 26 202

The size of the population is shown on the horizontal axis (the independent variable x) and the value of quarterly
sales on the vertical axis (the dependent variable y). A scatter diagram enables us to observe the data graphically
and to draw preliminary conclusions about the possible relationship between the variables. Quarterly sales appear
to be higher in locations with larger populations . For this data, the relationship between the population size and
sales appears to be approximated by a straight line — there seems to be a positive linear relationship between x
and y> We therefore choose the simple linear regression model to represent the relationship between sales and
population. The next step is to determine the values of a and b in the estimated regression equation where y =
a + bx and

y = estimated value of quarterly sales (€000)

x = the size of the population (000) for each restaurant
a = the y intercept of the regression line
b = the slope of the estimated regression line.

The scatter diagram is shown below (and the regression equation in part (ii) is superimposed on it.

7
(ii) The linear regression equation is: y = a + bx where

∑y = na + b∑x
∑xy = a ∑ x + b ∑x2 ; and

a = ∑y - b∑x
n n
b = n∑xy - ∑x∑y/n
n∑x2 - (∑x)2 /n

Restaurant x y x2 xy
1 2 58 4 116
2 6 105 36 630
3 8 88 64 704
4 8 118 64 944
5 12 117 144 1,404
6 16 137 256 2,192
7 20 157 400 3,140
8 20 169 400 3,380
9 22 149 484 2,278
10 26 202 676 5,252
140 1,300 2,528 21,040

Inserting values gives

b = 21,040 - 140 x 1,300/10

2,528 - 1402/10

= 21,040 - 18,200 = 5
2528 - 1,960

a = 1300 - 5 x 140 = 60
10 10

Therefore, y = 60 + 5x.

(iii) When x = 21, y = 60 + 105 = 165.

Quarterly sales for this restaurant is predicted at €165,000.

8
Solution 5.
(i) The trend by means of centred moving averages.

Quarter

Year 1 2 3 4
2001 16 23 28.6 27.1
2002 23.1 29.3 32.6 28.9
2003 23.6 29.1 32.4 29.6
2004 25.5 33.7 39.0 35.0

Year Quarter New Houses Moving Moving Av. Centred

(000s) Total Moving Av (TxC)
1 1 16.0
2 23.0
3 28.6 94.7 23.675 24.56
4 27.1 101.8 25.450 26.24
2 1 23.1 108.1 27.025 27.53
2 29.3 112.1 28.025 28.25
3 32.6 113.9 28.475 28.54
4 28.9 114.4 28.600 28.58
3 1 23.6 114.2 28.550 28.53
2 29.1 114.0 28.500 28.59
3 32.4 114.7 28.675 28.91
4 29.6 116.6 29.150 29.73
4 1 25.5 121.2 30.300 31.13
2 33.7 127.8 31.950 32.63
3 39.0 133.2 33.300
4 35.0

Trend — smoothed data.

(ii) The data given in part (i) is a known time series. By drawing the centred moving average we are decomposing it to
isolate the combined trend and cyclical components denoted by TxC. The isolation of TxC is based on the average
excluding the effects due to seasonal and irregular variations. Because the data are listed by quarters it gives us
the opportunity to isolate the trend and cyclical components by combining four quarters. The peaks and valleys that
occur within each year are "smoothed". The column of centred moving averages represents estimates of the
combined trend and cyclical components.

9
 Recognising that the trend (T) is a long-term increasing or decreasing pattern and cyclical variations (C) is a
pattern that repeats over time periods longer than one year, the combined effect of the TxC component is a longer
term effect, that is, it eliminates the short-term effects from seasonal and irregular variations. The graph of the
smoothed data gives the long term picture. It is possible to further decompose TxC so that the individual trend (T)
and cyclical (C) components can be obtained. The trend equation is derived by regression analysis using the
dependent variable Y (TxC) and independent X (quarters). The trend value can be derived for each quarter.

The cyclical variation is then derived by C = TxC (from the data in part (i)
T (from the regression line).

Values of C are therefore expressed as index numbers that multiply C. In this way the value of C can be
separated.

Solution 6.

(i) This is an annuity of 5 annual payments of €8,000. The interest rate is 12 per year. The present value of an annuity
(mortgage) is

PV = 8,000 + + 8,000
1.121 1.125
PV = a(1 - rn) where
1- r

a = regular sum received X discount factor,

r = common ratio = 1/(1 + i), i = rate of discount,

n = number of time periods.

Therefore, PV = 8,000 x 1 - (1/1.12)5

1.121 1 - (1/1.12)

= 7,143 x 1 - 0.8935
1 - 0.893
= 7,143 x 0.442
0.107

= €29,506.

(ii) Equation to represent company s costs y = ax + b

where y = total costs, x = number of units produced

a = cost per unit, b = fixed costs.
Therefore y = 5x + 20,000.
To generate a profit of €8,000: Profit = total revenue - total costs
8,000 = 15x - (5x + 20,000)
28,000 = 10x
x = 2,800 units.

(iii) 95% confidence interval and limits for µ

µ = x – 1.96 (s/ˆn)
= 950 – 1.96 (15/ˆ36)
= 950 – 1.96 (2.5)
= 950 – 4.9.
Therefore, µ = 945.1kg to 954.9kg.
We are 95% confident that the mean will lie within these limits

10