BUSINESS MATHEMATICS &

QUANTITATIVE METHODS
FORMATION 1 EXAMINATION - AUGUST 2006

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

STATISTICAL FORMULAE TABLES ARE PROVIDED

DEPARTMENT OF EDUCATION MATHEMATICS TABLES ARE AVAILABLE ON REQUEST

TIME ALLOWED:
3 hours, plus 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 - AUGUST 2006.

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

1. As a financial consultant you are providing advice to an investor on the following proposal. He wishes to
invest €25,000 in a managed fund for 5 years with an expected rate of return of 5%. If he leaves the
investment, or any part of it, in a particular plan for a further 4 years the rate of return will increase to 7%. He
wants, however, the option to withdraw half the original sum of €25,000 after the 5 year period. You are
required to advise the investor on

(i) The total value of the investment after the 9 year period if nothing is withdrawn
(8 Marks)

(ii) The total value of the investment if half the money is withdrawn after the 5 year period
(8 Marks)

(iii) Write a note on the ‘time value of money’ (4 Marks)

[Total: 20 Marks]

2. Trainees for DIB Manufacturing Co. Ltd are paid a salary during training based on both their experience and
stage of training. The number of trainees and the allowances paid are set out in the following table.

Payment € Number of Trainees

100 and less 110 1
110 and less 120 4
120 and less 130 7
130 and less 140 13
140 and less 150 7
150 and less 160 3
160 or more 1

You are required to

(i) Present the data on a cumulative frequency graph (8 Marks)

(ii) Estimate the median allowance from the graph (4 Marks)
(iii) Compare the median with the mean and modal allowances. (8 Marks)

[Total: 20 Marks]

1
3. The SECO hotel, a small family owned enterprise, is attempting to estimate the expected daily profit from the
business. Although the hotel has a prestigious restaurant the daily profit depends on room occupancy. As the
adviser to the hotel you have estimated the probability of the number of guests arriving each night. The data
is set out in the following table.

No guests 1 2 3 4 5
Probability 0.1 0.2 0.4 0.2 0.1
Profit / room € 35 75 125 175 225

As part of your report to the hotel owner you are asked to include details on the following.

(i) Explain how the expected profit is measured and what it represents ? (8 Marks)

(ii) Calculate the expected daily profit from the data provided (8 Marks)

(iii) Write a note on probability and ‘expectation’ (4 Marks)

[Total: 20 Marks]

4. On the international commodities market the movement in the price of particular foods will have a major
impact on local prices to consumers in Ireland. The following data from the EU Bureau of Statistics indicates
the trend in prices for three high consumption products over the past 3 years.

Price (€ per 1000 kgs)

Commodity 2003 2004 2005
Coffee 20 25 35
Bananas 12 14 18
Tea 6 8 12

As an analyst for the Consumers Association you are required to

(i) Develop a simple price index for each product (8 Marks)

(ii) Develop a simple aggregate price index (8 Marks)

(iii) Explain the principles underlying your calculations for both indexes and the results obtained.
(4 Marks)

[Total: 20 Marks]

2
5. CPA office refurbishment is due to commence in September 2006. The contractor has stated that the project
will be finished within 10 days. You have been asked to confirm the duration of the work since it will be
necessary to vacate the premises for that time. The following list of activities and durations have been
provided by the contractor.

Activity Preceding Duration

Activity (Days)
A Remove all furniture - 2
B Clear all areas - 1
C Put in new utilities (gas,
water, electricity) - 6
D Rewire rooms A,B 5
E Add more power points A 2
F Add new fittings D 3
G Modify wiring layout A,B 3
H Change lighting E 2
I Test lights, fittings C,G,H 1
J Test all systems F,I 1

You are required to:

(i) Draw a network to illustrate the activities (10 Marks)

(ii) Confirm the duration of the project and indicate the critical path. (10 Marks)

[Total: 20 Marks]

6. "A number of methods are available to attempt to achieve a representative sample of the population" Outline
the principles of four of the following methods of sampling:
(i) simple random sampling
(ii) stratified random sampling
(iii) systematic sampling
(iv) multistage sampling
(v) quota sampling
(vi) cluster sampling

[Total: 20 Marks]

END OF PAPER

3
 Suggested Solutions

BUSINESS MATHEMATICS &

QUANTITATIVE METHODS
FORMATION 1 EXAMINATION - AUGUST 2006.

SOLUTION 1.

(i) The general formula for calculation of compound interest is

Sn = P(1 + r)n

where Sn = sum accrued, P = principal, r = interest rate, n = number of time periods.

P = €25,000, n = 5, r = 5% = .05

S5 = 25,000 (1 + 0.05)5 = 25,000 (1.2763)

= €31,907.5 4 Marks

This is reinvested for 4 years

S9 = 31,907 (1 + 0.07)4 = 31,907 (1.3108)

= €41,823.7 This is the final value after 9 years.

4 Marks

(ii) If half the investment is withdrawn after 5 years, that is, €12,500. the balance remaining is €31,907 - €12,500
= €19,407 (P).

S9 = 19,407 (1 + 0.07)4 = 19,407 (1.3108)

= €25,438.7 8 Marks

(iii) Time value of money. Capital investment decisions are those decisions which involve current outlays of cash
in return for a stream of benefits in future years. Projection of company expenditures are made in the
expectation of realising future benefits. However, because money can be used to earn interest, waiting for
the recoupment of this money has a cost. Since we are waiting for the return of out investment funds so that
they can be invested elsewhere we favour projects which give us the earliest cash flows. This implies that
money has a time value. The concept of a cost of capital relies on this. In order for us to forgo the use of
money for a period an amount should be paid in compensation. That is money received at different points in
time is of differing significance. The longer we have to wait for it the less valuable a given sum is. The extent
of this is governed by the rate of interest.
4 Marks

[Total 20 Marks]

4
 SOLUTION 2

(i) The ogive is constructed from the following data. From the open ended distribution the end point has been
set at 180.

Class No Mid Payment Cumulative

Boundaries Trainees Point less than frequency
(f) (x) € fx
100 0
100 - 110 1 105 110 1 105
110 - 120 4 115 120 5 460
120 - 130 7 125 130 12 875
130 - 140 13 135 140 25 1755
140 - 150 7 145 150 32 1015
150 - 160 3 155 160 35 465
160 + 1 165 180 36 165
∑ 36 4840

2 Marks

Cum Frequency

40 x
x
x
30
x

20

x
10 Median
x
x

10 0 110 120 130 140 150 160 180

Payment € / week
6 Marks

(ii) The median can be derived from the graph and is approx. €137. 4 Marks

(iii) Mean = x = ∑fx = 4820 = €134 2 Marks

∑f 36

Mode: found from the payment range with the greatest frequency, €130 - €140.

2 Marks

5
The appropriate value:

• Since the mode is the value that occurs most often, it may be accepted as typical of the data; it is not
consistent in that there may be more than one mode in a set of data

• The median is considered to give a true middle of the data set and is preferable if there are extreme
values in the data

• The mean uses every data equally in its calculation but is influenced by exceptionally high or low values
in the data.

In the present case there is very little difference between the various values.

4 Marks

[Total 20 Marks]

6
SOLUTION 3.

(i) Many quantitative techniques treat situations with certainty. However, in many business situations it is not
possible to treat outcomes with certainty. This can be done by developing a probability model and a
probability distribution can be used. This gives a distribution of profits with their associated probabilities. In
this case there is no single deterministic value for the profit. The expected value is an average of the possible
range of outcomes weighted according to their probability of occurance, that is, expected value

E(X) = X1P(X1) + X2P(X2) + ------------------ XnP(Xn)

The probability is expressed as a value between 0 and 1. The total probability must equal 1. Since the total
distribution of values is used then the expected value is equal to the mean of the x values. The expected
values themselves represent a long-term average and, as individual values, they are unlikely to occur.
However, in business situations they give a single value for comparing alternatives and represent a ‘best’
single estimate of an uncertain situation.

8 Marks

(ii)
No guests 1 2 3 4 5
Probability 0.1 0.2 0.4 0.2 0.1
Profit / room € 35 75 125 175 225

The expected profit is

E(X) = X1P(X1) + X2P(X2) + X3P(X3) + X4P(X4) + X5P(X5)

where X is the profit per occupied room.

E (X) = 0.1 x 35 + 0.2 x 75 + 0.4 x 125 + 0.2 x 175 + 0.1 x 225

= 3.5 + 15 + 50 + 35 + 22.5

= €126

The average expected daily profit is €126 – this is the average amount that will be generated per day over
a long period.
8 Marks

(iii) Probability and expectation. This process is part of decision analysis and involves using a range of
techniques to assist the manager in choosing the most appropriate decisions in given circumstances. There
are a number of practical decision making techniques using probability. Such methods are necessary since
there are many circumstances where relevant information is not known with any degree of certainty. There
may be probabilities associated with the likelihood of an event occurring and this will allow an ‘expected’ value
to be determined. In many examples the expected value is obtained by multiplying a probability by the total
number of values. For example, if the probability of an employee being satisfied with their job is 0.75 and
there are 200 employees in the company, the expected number of satisfied employees would be 0.75 x 200
= 150. This process can be extended to relate to more complex problems. In general the expected value of
a variable is obtained by multiplying each probability by the corresponding value and obtaining the sum of
these products. The expected value can be regarded as being an estimate of the average value for the
variable.

4 Marks

[Total 20 Marks]

7
SOLUTION 4.

(i) Commodity 2003 2004 2005

Coffee 20 25 35
Bananas 12 14 18
Tea 6 8 12

To construct a simple price index calculate the ratio of the new price to the base year price for each
commodity and then multiply by 100. the ratio of new price to vase year price is the ‘price relative’.

Simple price index = Pn/Po x 100 where Pn = new price (year n), Po = base year price (year 0).

Simple price index for each of the commodities.

Year Price Pn/Po Index
Coffee 2003 20 1.00 100
2004 25 1.25 125
2005 35 1.75 175

2 Marks
Year Price Pn/Po Index
2003 12 1.00 100
Bananas 2004 14 1.16 116
2005 18 1.50 150
2 Marks

Year Price Pn/Po Index

2003 6 1.00 100
Tea 2004 8 1.33 133
2005 12 2.00 200

2 Marks

From the above it can be seen that the price of coffee has risen by 75%, the price of bananas by 50% and
the price of tea by 100% over the whole time period.
2 Marks

(ii) To derive an index for the overall change in price of all three types of commodity, a ‘simple aggregate price
index’ is required.
To include all three types of commodity their respective prices in each of the three years is summed, that is,
Simple Aggregate Price Index = ∑ Pn x 100
∑ Po 2 Marks

Where Pn = new prices (year n) and Po = base year prices (year 0).
Coffee Bananas Tea ∑ Pn / ∑ Po
P2003 20 12 6 38/38 = 1.00
P2004 25 14 8 47/38 = 1.23
P2005 35 18 12 65/38 = 1.71
6 Marks

This price index shows that the aggregate prices of the three drinks has risen by 71%. However, this index
has ignored the relative quantities consumed in each of the three years. If consumption is taken into account
the fact that tea experienced the greatest % increase in price over the period should be taken into account
by calculating a weighted aggregate price index. 4 Marks
[Total 20 Marks]

8
SOLUTION 5.

(i) The network for the activities is outlined below. It illustrates the sequence of activities and the steps involved.

10 Marks

The following additional information is provided to give students an appreciation of the process in deriving the
network but is not required in the examination.

Each activity is represented by an arrow on the diagram. Circles are numbered and drawn to indicate the start
and of finish activity. The diagram shows the relationships between the activities as set down in the table. In
order to produce a network diagram a list of activities is required and the interdependence between activities,
that is, the activities that precede other activities. In the above diagram a ‘dummy’ activity is introduced
because activities D and G both follow A and B and E only follows A. The purpose of this dummy is to maintain
the logic of the sequence.

(ii) The total project duration is an important factor when managing projects. The overall duration can be
calculated from the network providing the duration of each activity is known. In order to calculate the overall
duration of the project it is necessary to estimate the earliest and latest event times. The earliest time is
determined by the longest route through the network and the largest value is used. This gives the earliest
time in which the project can be completed. The latest event times are then calculated. In the network the
latest event time equals the earliest event time. Preceding latest event times are calculated by subtracting an
activity’s duration from the subsequent latest event time. If two or more activities start from an event, the latest
time for each route is calculated and the lowest value is used. Both values are shown in the diagram. It shows
that the project can be completed in 11 days.

The critical path identifies the route that defines the overall duration. The activities on the critical path have
no flexibility if the project is to finish on time. It is 1-2-4-6-7-8 and takes 11 days.

10 Marks

[Total 20 Marks]

9
SOLUTION 6.

Sampling Methods. There are a wide range of sampling methods depending on the type of sample required and
the technique being used. A description of four of the following methods is required.

Simple random sampling. In this case every member of the population must have an equal chance of being included
in the sample. For large populations each member is normally given a unique identification number and then
random numbers are generated or random tables are used. The sample then comprises the population members
whose numbers match those generated from the random numbers. This method has minimum bias. In some cases
it may be difficult to contact all members of the chosen sample and occasionally an unrepresentative sample may
occur. This method is used by large marketing companies to obtain a wide geographical spread in the data.
5 Marks

Stratified random sampling. This method is similar to simple random sampling but is used where the population
contains distinct groups, that is, groups with different views about the issues under study or of particular interest.
The sample can be stratified according to the particular groups so that it has the same proportions, approximately,
as the population. For each stratum the sample members are selected randomly as for simple random sampling. It
is a unbiased method and gives a representative sample. The process of stratification can be expensive and incurs
costs additional to the survey process.
5 Marks

Systematic Sampling. This method is similar to simple random sampling. In this case the data are assumed to be
random and every nth member is selected where n is determined by (population size) / (sample size). The start
point of the sample may be chosen randomly. It is an inexpensive and easy method to use and is useful if the exact
population is unknown. Often particular steps must be taken to ensure that the sample is not biased.

5 Marks

Multistage sampling. This is a process used for producing a representative sample form a widespread population.
The process selects individual sampling units by splitting the sampling process into stages and using the most
relevant sampling technique. A typical process is a three-stage survey where 1) stage 1 takes a number of primary
sampling units – the population may be divided into a number of regions and then randomly select a number of
these 2) Stage 2 where each of the regions is taken and random samples of sub-regions taken (secondary sampling
units) 3) stage 3 where individuals could be selected by using systematic sampling (tertiary sampling units). This
technique is used for widely spread data.
5 Marks

Quota sampling. Used where interviewing is the main method of data collection. It is necessary to ensure that the
composition of the sample matches that in the population. The interviewer is given a predetermined sample profile
where the number of interviewees in each category is chosen to match the population proportions. The interviewer
selects from the population to match the required numbers in each category proportions. This method tends to
have a good response rate. However, it is a non-random technique and is reliant on the interviewer.

5 Marks

Cluster Sampling. This method is used when the population items of interest are widely spread and it is desirable
to ensure that the sample elements are grouped together in some way. A number of groups/areas would be selected
and populations within those groups could be interviewed. This is a useful method for widely spread geographical
data where the population is not defined exactly.

5 Marks

[Total for four: 20 Marks]

10