Quantitative Technques-Notes

Frontier institute of professional & mangt’studies -Garissa
FRONTIER INSTITUTE OF PROFESSIONAL AND MANAGEMENT STUDIES
FULLY REGISTERED WITH THE MINISTRY OF EDUCATION, SCIENCE

AND TECHNOLOGY REG. CERT NO.
MOHEST/PC/1383/011
‘Next Level in Your Career’

QUANTITATIVE TECHNIQUES
Garissa Main Office Wajir Branch Moyale Branch

Maendeleo Plaza 2nd Floor Left Wajir Plaza Alyusra Guest House 3rd Floor,
Wing. Harambee Street Garissa, 1st Floor Mosque Rd
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Tel: 046-2102108, 0722-227225 Cell Phone: 0722-578704 Cell Phone: 0726 -713949
info@frontierinstitute.ac.ke fipamswajir@frontierinstitute.ac.k fipamsmoyale@frontierinstitute.ac.
COURSE OUTLINE
Prepared by Mr. Kiarie Page 1

QUANTITATIVE TECHNIQUES
Purpose: To equip students with skills in quantitative techniques necessary for decision making
in business
Expected Learning Outcomes of the Course: By the end of the course unit the learners should
be able to:-
i. Apply sets theory, probability and linear programming in decision making
ii. Summarize raw data into information for decision making
Course Content:
Measures of central tendencies; Measures of dispersion; Probability- Axiom definition of
probability;; Conditional probability; Probability trees; Linear equations, inequalities and their
applications; Utility functions and curves
Course Assessment
Examination - 70%; Continuous Assessment Test (CATS) - 20%; Assignments - 10%; Total -
100%
Recommended Text Books:
 Sweeny Williams Anderson (2007), Quantitative Methods For Business, McGraw Hill,
New York
 Oakshott Les (2006), Essential Quantitative Methods For Business, Management And
Finance Routledge, London
 B S Sharma(2006); Quantitative Methods; Anmol Publications Pvt
 Anderson (2007); Quantitative Methods; Cengage Learning ( Thompson )
 Louise Swift and Sally Piff (2005), Quantitative Methods For Business, Management
And Finance McGraw Hill, New York
TOPICCS SUB-TOPICS
WK

1 INTRODUCTION TO Q.T -operational research

-essentials of operational research
-applications
2&3 EQUATIONS AND -definition
INEQUALITIES
-properties of equality
-terms used in equation
-variables
-graphing a linear inequality
4&5 LINEAR PROGRAMMING --introduction
-assumptions to linear programming
-advantage and limitations of linear programming
-application of linear programing
CAT 1
6&7 MATRIX ALGEBRA -introduction to matrix
-addition, subtraction and multiplication of matrix
-invert matrix
8 PROBABILITY THEORY -introduction
-terminologies used in probabilities
-probability theory
9 CORRELLATION -relationship between variables
ANDREGRESSION
ANALYSIS
CAT 2
10&11 MEASURES OF CETRAL -various types of averages
TENDANCY
 Arithmetic mean
 Median
 Mode
 Weighted mean

 Geometric mean
 Harmonic mean
-qualities of a good average

12&13 REVISION
ANDEXAMINATION
TOPIC ONE: INTRODUCTION TO QUANTITATIVE TECHNIQUES
By the end of the topic learners should be able to

 Describe the principles of a model-based approach.

 Discuss various types of models.
 Illustrate the importance of risk and uncertainty.
 Describe the stages in an operational research study.
Operational Research definition
Operational Research is the attack of modern science on complex problems arising in the
direction and management of large systems of men, machines, materials and money, in industry,
business, government and defense, the distinctive approach is to develop a scientific model of the
systems incorporating measurements of factors such as change and risks, with which to predict
and compare the outcome of alternative decisions, strategies or controls. The purpose is to help
management determine its policy and action scientifically.
Essential features of the OR approach
The above formal definition contains several essential features and these are;
 Application of a model-based scientific approach.

 Systems approach to organizations.
 The recognition of risk and uncertainty.
 Assistance to management decision making and control.
Application of a model-based approach
The basis of the OR approach is that of constructing models of problems in an objective, factual
manner and experimenting with these models to show the results of the various possible course
of action. A model is any representation of reality and may be in graphical, physical or
mathematical terms. The type of model most frequently used in OR is a mathematical model,
i.e.one which tries to show the working of the real world by means of mathematical symbols,
equations and formulae.
An example of a simple mathematical model familiar to accountants could be the following

equation to estimate the total overheads for a period. Assume that the total overheads comprise
fixed overheads and variable overheads which are directly related to the units produced, then the
equation:

Y= a + bx
Is a model of the relationship of total overheads to the number of units produced where?
Y = Total overheads
a = Fixed overheads per period
b = Variable overheads per unit (assumed to be constant)
x = Number of units produced
The above model is obviously very simple and most practical models are of necessity much more
complex. It is important to realize that however complex looking a model is and however many
variables it contains, it still involves considerable simplification of reality and any results or
predictions obtained from the model must therefore be used with caution and judgment.
Although mathematical or symbolic models are common, other types of models e.g. Iconic,
Analogue, simulation and Heuristic sometimes have applicability.
Iconic models
They are visual models of real object(s) they represent. They may be larger or smaller than the
reality. For example, a model steam engine is much smaller than the real thing whilst the
familiarcolored plastic models of molecular structures are much larger. Both of these iconic
models and so are pictures, maps and diagrams although these latter are in a different form to the
reality they present. These models are often difficult to manipulate experimentally (but not
always e.g. wind tunnel model for aircraft) so are not used greatly in operational research.
Analogue model
They use one set of physical movements or properties to represent another set. For example, the
movement of a piece of metal under stress can be represented in a more observable form by the
movement of a gauge finger. Fathom lines on charts and lines on graphs are also analogues of the
reality they represent.
Although analogue models are more versatile than iconic models they generally lack the
flexibility of mathematical models.

Simulation models
It represents the behavior of a real system. Perhaps the best known example is the flight
simulator used in the training of pilots. Simulation models are used where there is no suitable
mathematical model, where the mathematical model is too complex, or where it is not possible to
experiment upon a working system without causing serious disruption – as in the case of the
training of pilots. One application of simulation models in the management context is the study
of the behavior of people and objects in queues. With the development of relatively inexpensive
computing facilities many business games are based on the stimulation of the operation of
complete business.
Heuristic models
These are models which use a set of intuitive rules which managers hope will produce at least a
workable solution, and a better solution than methods currently being used. For example, a
deliver van driver may be instructed to plan the day’s deliveries using the following rule, after
each call delivery to the nearest customer whom you have not yet visited. This will certainly give
a good solution early in the day, but it can lead to some long distance being travelled at the end
of the day back to the depot. The driver has no way of knowing whether the route gives optimum
time and distances and any improvements can come only through testing other heuristic
approaches.
Models may be further classified into normative and descriptive. Normative models are
concerned with finding the best, optimum or ideal solution to a problem. Many mathematical
models fall into this classification. Descriptive models, as their name implies, describe
thebehaviour of a system without attempting to find the best solution to any problem. For
example, simulation tends to fall within this category.
Perhaps the most important point to appreciate is not so much what a model is called but what it
does in helping managers to attain the goals that they have set.
Systems approach to organization
The primary aim of OR is to attempt to identify the best way of conducting the affairs of the
organization i.e. the optimum. In studying problems the OR practitioner tries to optimize the

operation of the organization as a whole rather than narrow aspects of the business such as a
single department or section. This is easier said than done and because of the practical necessity
of dealing with manageable areas of work and thereby producing simplified and incomplete
models of operations there may be a tendency to produce suboptimal solutions, i.e. a solution
which is optimal for a small section of the firm, but not optimal for the firm as a whole. This is
another point which should be watched when considering the results of an OR investigation.
Recognition of risk and uncertainty
All business planning and decision making involves forecasting future activities. This cannot be
done with any certainty and so to provide the maximum possible assistance to planners and
decision makers a systematic analysis of the possible extent of the risks and uncertainties
involved is a vital part of any OR study. OR techniques do not of themselves remove the risks
and uncertainties, but they are able to highlight their effects on the firms operations. An
important method to help with this process is what is termed sensitivity analysis. When a
solution has been obtained using one of the OR techniques ( such as linear programming,
inventory control, investment appraisal) alterations are made to the factors of the problem, such
as , sales, costs, amount of materials, to see what effect there is on the original solution. If the
value of the original solution alters considerably with minor changes in the factor values it is said
to be sensitive. In such circumstances the whole problem will need much deeper analysis and
particularly sensitive factor may cause decisions to be altered.
Assistance to management decision making and control
In general OR practitioners do not make the business decisions. Their role is the provision of
information to assist the planners and decision makers. The skill, experience and judgment of
managers cannot be replaced by formal decision making techniques. The results of an OR
investigation are but one input of information into the decision making process. There is a strong
parallel between the OR practitioner supplying information for management decision making
and that of other information specialists such as accountants. This is why a knowledge of OR for
the accountant (and accountancy for the OR practitioner) can be very useful and can improve
quality of the information provided. There are strong reasons why the most effective OR teams
contain people drawn from various background –economists, accountants, mathematicians,

engineers, psychologists etc. in this way there is more chance that the numerous facets of
business problems can be recognized and analyzed.
Quantification of factors
Not all factors involved in a decision making or planning situation can be quantified, but themost
readily usable OR techniques are those based on quantifiable factors such as costs,
revenues, number of units etc. these techniques are the ones most commonly included in
examinations and form the basis of the syllabuses of the major professional bodies, hence the
contents and title of this book.
Revision Exercise
1. Define operational research
2. What are the essential features of the Operational Research Approach?
3. How does operational research assist management decision making?
4. What are the stages in an operational research study?
5. Give reasons why the results of an operational research study may not be implemented?
TOPIC TWO: EQUATIONS AND INEQUALITIES

OBJECTIVES
By the end of the topic the learner should be able to
 Identify different types of variables

 Solve linear equations
 Solve linear inequalities
 Represent linear inequalities graphically.

Definition of an equation
An equation is a mathematical statement that relates two algebraic expressions involving at least
one variable.
It is a statement showing the equality of two expressions.
Properties of equality
For any real numbers a, b and c
1. Addition property: If a=b, then a+ c= b + c
2. Subtraction property:If a=b, then a- c= b - c
3. Multiplication property: If a=b, then ac = bc
4. Division property:If a=b, then a/c = b/c
5. Substitution property: If a=b, then either may replace the other in any statement without
changing the truth or falsity of the statement.
Terms used in equations
(a) Unknown
These are the variables whose values are not given. They are found by solving the equation e.g.
in the equation 4x + 5y =40 and are unknowns. x and y .
(b) Constants
They are fixed figures, which are shown on the left hand side of unknowns or separately. From
the equation 4x + 5y =40, 4, 5 and 40 are constants.
(c) Coefficients

They are those figures, which are shown on the left hand side of unknowns. From the equation
4x + 5y =40 , 4 and 5 are coefficients of and respectively.
(d) Index
It is the power of an unknown. It is shown on the right hand side on top of any unknown e.g. in
the equation, 4x3 +2x + 3 has an index or power 3.
Variables
Definition of a variable
It is a measurable characteristic that assumes different values among the subjects.
Types of variables
1. Independent variables / Predictor variables
It is a variable that a researcher manipulates in order to determine its effect or influence on

another variable. They predict the amount of variation that occurs in another variables.
Types of independent variables
Experimental variables: They are variables which the researcher has manipulative control over
them. Are commonly used in biological and physical sciences e.g. influence of amount of
fertilizer on the yield of wheat, influence of alcohol on reaction time.
ii. Measurement types of independent variables: Are variables, which have already occurred.
They have fixed manipulative and uninfluenceable properties. Most of the variables are either
environmental or personal e.g. age, gender, marital status, race, colour, geographical location,
nationality, soil type, altitude etc. (e.g. influence of nationality on choice of food).
2. Dependent variables / criterion variables
They attempt to indicate the total influence arising from the effects of the independent variable.
It varies as a function of the independent variable e.g. influence of hours studied on performance
in a statistical test, influence of distance from the supply center on cost of building materials.

3. Discrete variables
They are variables, which can only assume whole numbers. They are always counted e.g.
number of cars, children, trees books etc.
4. Continuous variables
They are variables, which can assume any value in a specific range. They are always measured
e.g. height, weight, weight, radius, distance etc.
5. Extraneous variables
They are those variables that affect the outcome of a research study either because the researcher
is not aware of their existence or if the researcher is aware, she or he has no control over them.
6. Control variables / concomitant / covariate or blocking variables
They are extraneous variables that are built into the study. They are introduced to increases the
validity of the data and to leads to more convincing generalizations.
Types of equations
There are three major types of equations. They include:-
(a) Linear / simple equations
(b) Quadratic equations
(c) Simultaneous equations
For this topic, we shall only deal with linear equations.
Linear / simple equations
They are equations with one unknown and the index of the unknown is one. It is of the form ax +
b =0. Where a and b are constants and the solution is obtained by writing ax= -b
Example 1: Solve for x in the following equation.

x - 4 = 10
Solution
Add 4 to both sides of the equation:
x = 14
The answer is x = 14
Check the solution by substituting 14 in the original equation for x. If the left side of the equation
equals the right side of the equation after the substitution, you have found the correct answer.
Example 2: Solve for x in the following equation.
2x-4=10
=2x=10+4
=2x=14
X=14/2
X=7
Example 3: Solve for x in the following equation
5x-6=3x–8
Example 5: Solve for x in the following equation
6x-7 +3x-5
4 7
Example6: Solve for x in the following equation
2(3x - 7) + 4 (3 x + 2) = 6 (5 x + 9) + 3
Complete multiplication.
6x-14+12x+8=30x+54+3
18x-6=30x+57
-6=12x+57

-63=12x
X=21/4
5.7.2 Solving Linear Inequalities
Example 1: Solve the inequality
6x - 6 > 2x + 2
Solution
Given 6x - 6 > 2x + 2
Add 6 to both sides and simplify (Property 2 above) 6x > 2x + 8

Subtract 2x to both sides and simplify (Property 3 above) 4x > 8
Multiply both sides by 1/4; and simplify (Property 4-i above) x > 2
Conclusion The solution set consists of all real numbers in the interval (2 , + infinity).
Example 2: Solve the inequality
2(3x + 2) - 20 > 8(x - 3)
Solution
Given 2(3x + 2) -20 > 8(x - 3)

Multiply factors and group like terms 6x + 4 -20 > 8x - 24 6x - 16 > 8x - 24
Add 16 to both sides and simplify (Property 2 above) 6x > 8x - 8
Subtract 8x to both sides and simplify (Property 3 above) -2x > -8
Multiply both sides by -1/2 and REVERSE (-1/2 is negative) the inequality sign and simplify
(Property 4-ii above) x < 4
Conclusion The solution set consists of all real numbers in the interval (- infinity, 4)
Example 3: Solve the double inequality
-3 < 4(x + 2) - 3 < 9
Solution
Given -3 < 4(x + 2) - 3 < 9

Multiply factors and group like terms -3 <4x + 8 - 3 < 9 -3 < 4x + 5 < 9
Subtract 5 to all three terms and simplify -3 - 5 <4x + 5 - 5 < 9 - 5 -8 < 4x < 4
Divide all three terms by 4 -2 < x < 1
Conclusion The solution set consists of all real numbers in the interval (- 2 , 1)
Graphing a Linear Inequality
Step 1: Graph the boundary line
Essentially you graph the boundary line the same as if the problem was a linear equation.
Assume that there is an equal sign and use an appropriate method to graph the line. Unless the
directions to a problem indicate otherwise, you can use any method to graph it. Two ways of
graphing linear inequalities are
 plotting any three points or
 Using the x and y intercepts.
When you draw the boundary line, you need to have a way to indicate if the line is included or
not in the final answer.
For a solid boundary line, < or >are used in the inequality. Otherwise the dashed line is used.
Example 1: Graph the inequality for x +y <6
The graph below shows the boundary line for x + y < 6: (note that this does not show the
inequality part)

Revision Exercise
1. Graph the following Inequalities:
i) y x + 3
ii) y > 2x – 1
iii) 2y 4x + 6
iv) 2x + y > 4
2. Which inequality is represented by the graph below?
TOPIC THREE: LINEAR PROGRAMMING

Objectives
By the end of the topic the learner should be able to:
 Formulate an appropriate LP problem

 Graph the constraint inequalities
 Identify the solution space or feasible region which satisfies all the constraints
simultaneously
 Locate the solution points on the feasible region.

 Evaluate the objective function at each of the corner points.

 Identify the optimum value of the objective function.
Introduction
Definition
It is a mathematical technique that deals with the optimization of a linear function of variables
known as objective function to a set of linear inequalities known as constraints.
It is a method of determining an optimum programme of inter-dependent activities in view of

available resources.
Basic parts of a linear programming problem

i. The objective function: it describes the primary purpose of the formulation i.e. to maximize
profit or to minimize cost.
ii. The constraint set: It is a system of equalities and / or inequalities describing the conditions
under which optimization is to be accomplished e.g. machine hours, man-hours, materials etc.
Assumptions of Linear programming

 Linearity: Costs, revenues or any physical properties, which form the basis of the
problem, vary in direct proportion with the quantities or numbers of components
produced.
 Divisibility: Quantities, revenues and costs are infinitely divisible i.e. any fraction or
decimal answer is valid.
 Certainty: The technique makes no allowance for uncertainty in the estimate made.

 Positive solutions: Non-negativity constraints are introduced to ensure only positive

values are considered.
 Interdependence between demand products is ignored, products may be complementary

or a substitute for one another.
 Time factors are ignored. All production is assumed to be instantaneous.
 Costs and benefits which cannot be quantified easily, such as liquidity, good will and
labour stability are ignored.
Advantages of Linear Programming
 Helps in attaining the optimum use of productive factors
 Improves the quality of decisions
 Improves the knowledge and skill of tomorrow’s executives
 It highlights the bottlenecks in the production process
 It gives insight and perspective into problem situations
 Enables one to consider all possible solutions to problems.
 Enables one to come up with better and more successful decisions
 It’s a better tool for adjusting to meet changing conditions.
Limitations of Linear Programming
 It treats all relationships as linear
 It is assumed that any activity is infinitely divisible
 It takes into account single objective only i.e. profit maximization or cost minimization

 It can be adopted only under the condition of certainty i.e. that the resources available,
per unit contribution, costs etc are known with certainty. This does not hold in real
situations.
Applications of Linear Programming
Linear programming can find use in many areas where decisions need to be made based on
scarcity of recourses. A few areas are mentioned below:.
 Business and industry e.g. in the petroleum industry
 Food processing industry: to determine the optimal mix of feeds
 Paper and textile industry: To determine the optimal cutting method to minimize trim
losses
 Transport industry: To determine the best route
 Financial institutions – to determine investment plans.
 Advertising media: assigning advertising expenditures to different media plans
 Politics- campaign strategies
 Auditing – to find the number of financial audits
 Agriculture- amount of fertilizer to apply per acre
 Hospital scheduling- number of nurses to employ
 Marketing – determining the best marketing strategy
 Crude oil refining
Mathematical formulation of Linear Programming problems
If there are n decision variables and m constraints in the problem, the mathematical formulation
of the LP is:-
Optimization (Max or Min) Z=c x +c x +…c x

1 1 2 2 n n
Subject to the constraints
a x +a x +…a x <b
11 1 12 2 1n n 1
a x +a x +…a x <b
21 1 22 2 2n n
a x +a x +…a x <b
m1 1 m2 2 mn n m
and x , x ,…x >0

1 2 n
Where
x - decision variable –
i
C constant representing per unit contribution of the objective function of the

j-
th
a constant representing exchange coefficient of the j decision variable in the
ij- -
th
i constraint
th
b constant representing i constraint requirement or availability
i---
Solutions to LP problems
LP problems can be solved by the help of the following methods:
i. Graphical method
ii. Simplex method
In this study we shall concentrate on the graphical method.
Solving Linear Programming Problems Graphically.
In order to solve a LP problem graphically, the following procedure is adopted:-

i. Formulate the appropriate LP problem
ii. Graph the constraint inequalities as follows: treat each inequality as though it were an
equality and for each equation, arbitrarily select two sets of points. Plot each of the points
and connect them with appropriate lines.
iii. Identify the solution space or feasible region which satisfies all the constraints
simultaneously. For ≤ constraints, this region is below the lines and for ≥ constraints; the
region is above the lines.
iv. Locate the solution points on the feasible region. These points always occur at the corner
points of the feasible region.
v. Evaluate the objective function at each of the corner points.

vi. Identify the optimum value of the objective function.
Example
At the start of the current week there are 30 units of X and 90 units of Y in stock. Available
processing time on machine A is forecast to be 40 hours and on machine B is forecast to be 35
hours.
The demand for X in the current week is forecast to be 75 units and for Y is forecast to be 95
units. Company policy is to maximize the combined sum of the units of X and the units of Y in
stock at the end of the week.
Formulate the problem of deciding how much of each product to make in the current week as a
linear program.
Solve this linear program graphically.
Solution
Let

x be the number of units of X produced in the current week
y be the number of units of Y produced in the current week then the constraints are:
50x + 24y <= 40(60) machine A time

30x + 33y <= 35(60) machine B time
x >= 75 - 30
i.e. x >= 45 so production of X >= demand (75) - initial stock (30), which ensures we
meet demand
y >= 95 - 90
i.e. y >= 5 so production of Y >= demand (95) - initial stock (90), which ensures we meet
demand
The objective is: maximize (x+30-75) + (y+90-95) = (x+y-50) i.e. to maximize the number of
units left in stock at the end of the week
It is plain from the diagram below that the maximum occurs at the intersection of x=45 and 50x
+ 24y = 2400
Revision exercise
1. A firm is engaged in producing two products A and B. each unit of product A requires 2 kg of
raw material and 4 labour hours for processing, whereas each unit of product B requires 3 kg
of raw material and 3 hours of labour, of the same type. Every week, the firm has an
availability of 60 kg of raw material and 96 labour hours. One unit of product A sold yields
Sh. 40 and one unit of product sold gives Sh. 35 as profit. Formulate this problem as a linear
programming problem to determine as how many units of each of the products should be
produced per week so that the firm can earn the maximum profit. Assume that there is no
marketing constraint so that all that is produced can be sold.
2. The Kenya Agricultural Research Institute suggested to a farmer to spread out at least 4800 kg
of a special phosphate fertilizer and not less than 7200 kg of a nitrogen fertilizer to raise
productivity of crops in his fields. There are two sources for obtaining these mixtures A and B.

Both of these are available in bags weighing 100 kg each and they cost 115 Sh. 40 and Sh 24
respectively. Mixture A contains phosphate and nitrogen equivalent of 20 kg and 80 kg
respectively, while mixture B contains these ingredients equivalent of 50 kg each. Determine
how many bags of each type the farmer should buy in order to obtain the required fertilizer at
minimum cost.
TOPICFOUR: MATRIX ALGEBRA

Objectives
 Define a Matrix
 Add, Subtract and Multiply Matrices and Vectors
 Describe Zero and Unity Matrices

 Invert a Matrix
Presentation of information
Accountants and businessmen are well versed with presenting information in tabular form or
writing information in rows and columns. Often one set of information in tabular form e.g.
depreciation by category of fixed asset, is worked upon to produce a subsequent set of
information based upon the first table, e.g. depreciation by category of fixed asset spread over
cost centre’s. Although not generally referred to as such the above are examples of matrices. An
understanding of matrices and matrix algebra may provide short cut methods of calculation and
will provide further insights into improved methods of presenting and manipulating data.
Matrix definition
A matrix is a rectangular array of numbers whose value and positioning in the matrix is
significant. A matrix is usually, but not always, shown in brackets thus,
18
37
Example 1
The size of a matrix is given by the number of rows and the number of columns, i.e. rows x
columns. The symbols most commonly used being m (columns) x n (rows). The matrix in
Example 1 is a 2 x 2 matrix, and as the number of columns equals the number or rows, it is
known as square matrix.
The following are further examples matrices:
12
3 4(3 x 2 matrix)
56

5 9 16
2 8 4(2x 3 matrix)
8 12 6
951 (3x 3 matrix i.e. squire
702
Matrix algebra
The particular rules applying the manipulation of data in matrix form are given in the following
sections on matrix addition, matrix addition, matrix subtraction, matrix multiplication and matrix
inversion. As a form of shorthand matrices are often referred to by capital letters, for example
A =1 6
52
83
C=32
16
Matrix addition
The only rule is that matrices to be added (or subtracted) must be the same size as one another,
I.e. they must have the same number of columns and the same number of rows, for example.
Example
A= 1 11 2
629
B= 2 0 7
596
1 11 2 2 0 72 11 9
A+B= +=

629 5 9 611 11 15
1 2 11 0 2 7 1 2 18
Matrix subtraction
Matrix subtraction uses the same general rules as matrix addition. For example, using the same
matrices as in
Example 8 calculate
1 11 2 2 0 7-1 9 -5
A-B - =
6 2 95 9 61 -7 3
Matrix multiplication
There are two aspects of matrix multiplication, the multiplication of a matrix by a single number,
called a scalar, and the multiplication of a matrix by another matrix.
Scalar multiplication
A scalar is an ordinary number such as 3,6,8,2 etc. The rule for this is simply-multiply each
element in the matrix by the scalar, for example.
Let A =5 2
83
And it required to find 4 x A
4xA= 4x5 2 = 20 8

8 3 16 12
Multiplication of matrices
A= 3404 28 52
1 -1 710 = -7 -6
2 32 1 38
32 -2 = 6
42 3 -2
3 101 = 303
1 101
-7 -7 0 -7
Determinant of 2x2 matrixes
A= ab multiply diagonal and subtract
cd
A =ad-cb
Example
B 3 1 B =3X4- 21 =10
24
Inverse of 2x2 matrix

B =3 1 B =10 1st determine determinant, change the sign diagonal and
24 change the position
B`1 =1/10 4/10 -1/10 31 =1 0
-2/10 3/10 24 01
Revision Exercise
1. How is the size of a matrix described?
2. What is a vector?
5. What is scalar multiplication?
6. What is the size rule for matrix multiplication?
7. How is matrix multiplication carried out?
8. What is the unity matrix?
9. Does A x A-1 = A-1 x A?
10. What are the steps in matrix inversion?
11. What are the essential conditions for simultaneous equations to be solved by matrix algebra?
12. What are probability transition matrices and what are they used for?
13.
X= 3 11 6
938
509
Y= 120
045
587

Calculate a) X+Y
b) X-Y
14. Multiply the matrices X and Y given in question 13
15. Let M = -64

31
Find M-1 using determinants and check your answer using row by row operations
TOPIC FIVE: CALCULUS

Objectives
 Calculate the derivatives of common expression.
 Use differentiation to solve typical problems.
 Use differentiation to find the maximum and minimum points of various functions.
 Undertake partial differentiation and basic integration.

 Distinguish between definite and indefinite integrals.

Why is calculus used?
Frequently it is possible to represent relationships by simple linear functions
For example, a linear function for total cost might have the form;
Y=a+bx
Where
Y = total cost, the dependent variable.
x= output or activity, the independent variable and a and b are constants representing fixed cost
and variable (or marginal) cost respectively.
Such a function is shown in the figure
A positive slope b= the line of a slope that

Representthe Marginal cost
Cost
b fixed
Activities
Figure 1.Graph of a simple linear cost function
In such a function the rate of change of cost (represented by ‘b’, the gradient of the line) is
constant at all levels of activity and will not increase or decrease at any level of activity. This is,
of course, is what is meant by a linear function. The value of b can be easily found by simple
arithmetic without recourse to more sophisticated techniques.
Differentiation
The process of differentiation establishes the slope of a function at particular point. Alternatively
this can be described as establishing the rate of change of the dependent variable (say, cost) with

respect to an infinitesimally small increment in the value of the independent variable (say,
activity).
For illustration consider the following two functions:
Function I y = x
Function II y = x2
Function I is a linear function whereas, because x is raised to the power of 2 (i.e. x2) in
Function II, that function is curvy-linear.
Assume now that the independent variable, x, is altered by a very small amount, m.
What is the rate of change in y caused by the change in the value of x?
Function I
If x is at some value A, then y is also at the value A. If x is altered by m then its value becomes x
= A + m and, as a direct consequences, the value of the dependent variable becomes
Y=A+m
It follows therefore that:
The rate of change of y with x = change in value of y = m =1
Change in value of x m
Generally written as
Dy
Dx, which means the derivative of a function when  x tends towards zero
Thus for the original function: y = x2
Derivative 2
Dy=2x
Dx
b) The derivative of a function gives the exact rate of change at a point and only gives
approximate results when used over a finite range. An example of the effect of this is where
differentiation is used to obtain the marginal cost from a curvy-linear cost function.
Accountants frequently define marginal cost as the increase in total cost due to an increase in
output of one unit. A whole unit is a finite range as far as differentiation is concerned and
consequently the marginal cost obtained from the derivative is only an approximation. This is a
technical point which is considered not to be of great practical significance

Dy =nx^n-1
Dx
Differentiate the following functions

Y=x^2+3x^-4+8
Solution
Dy/dx=2x^2-1+3(-4)x^-4-1+0
NB/ when differentiating, a constant becomes zero
Dy/dx=2x-12x^-5
Examples
Function Derivative
Y = 3x^2 = dy/dx=6x
Y = 8x^4 = dy/dx=32x
Y = -7x^5 =dy/dx=-35x
Application of differentiation
A practical example of differentiation
Now that the idea of differentiation has been explained and the rules given for differentiating
common functions, a practical example can be considered.
Illustration:
A firm has analyzed their operating conditions, prices and costs and has developed the following
functions
Revenue Ksh (R) = 400Q-4Q2 and Cost Ksh (C) = Q2+10Q+30
Where Q is the number of units sold
The farm wishes to maximize profit and wishes to know
i. What quantity should be sold?
ii. At what price?

iii. What will be the amount of profit?
Note: Previous examples have used y and x which results in the derivative
Dy/dx
This example uses R, C and results in the derivatives
dR/dQand .dC/dQ
Solution
From basic economic theory it will be recalled that profit is maximized when
Marginal Cost = Marginal Revenue and, as explained in this chapter, differentiating a function
gives the rate of change of that function which is equivalent to the marginal cost or revenue. Ksh
R = 400Q-4Q2 and dR/dQ= 400-8Q = Marginal Revenueand Ksh C = Q2+10Q+30 and
DC/dQ = 2Q+10 = Marginal Cost
Points of profit maximization is when
MR = MC ordRdC/=dQ/ dQ
I.e. 400-8Q = 2Q+10
Q = 39 answer (a)
Total Revenue = 400(39) -4(392),
= Ksh 9,516 and, as 39 will be sold,

Price will be 9,516/39=Ksh 244 each answer (b)
Total Profit = Revenue-Cost

Revenue = Ksh 9,516 from above and
Cost = (39)2 + 10(39) +30 = 1,941

 Profit = Ksh 7,575 answer
Integration

For our purposes integration can be regarded as the reverse of differentiation. Differentiation
establishes the slope of the function at a point whereas integration can be defined as the
procedure for finding the area under the curve of a function i.e. integration is a process of
summation.
As integration is the reverse of differentiation
This can be described as

‘The function which gives 4x^3 when differentiated with respect to x is x^4,
However the integral above is not complete because it will be recalled from the paragraphs that
X^4 + 10, or x^4 + 50, or x^4 + c, where c is any constant also have as their derivative 4x3 so
that is essential to recognize this possibility by writing
 4x^3dx  x^4  c
The integral including the undetermined constant is known as the indefinite integral. The value
of the constant can, in some instances, be inferred to be zero or it may have a value when
additional information known as an initial condition is supplied.
Examples
Functions Integral
Y=10x4 10x^4dx=10x^5 +c =2x^5+c
5
Notes:
a) It will be seen that a constant is added to each integral
b) Since differentiation is a more straight forward process is useful to check the integral by
differentiating it to see that it comes back to the original expression.
For instance differentiating 2x^5+c gives 10x4 which is the first example above
Revision questions
1. A cost function is
Ksh (c) = Q2-30Q+200
Where Q = quantity of units produced
Find the point of minimum cost.

2. A firm selling a trade Directory has developed a profit function as follows:

P = 9D-0.0005D2+0.06DA-80A2-5,000
Where D = number of directories sold and
A= number of advertising pages
How many directories containing how many advertising pages should be sold to maximize
profits?
3. Explain briefly the usefulness of the following concepts in business decision making:
i). functions
ii). derivatives
iii). integrals
4. Bright Shiners Co. Ltd. manufactures electrical repairs components. The company has
determined that the total cost of producing the components is:
C =100 + 50q
Furthermore the company has estimated the price for each component to be:
P = 100-q
Based on this information determine
i). the break -even quantity.
ii). the profit when 25 components are produced and sold.
5. A firm sells each unit of its product for Ksh 400. The cost function which describes the total
cost C as a function of the number of units produced and sold x is:
C = 40x + 0.25x2 + 250
Determine the maximum profit and the corresponding total revenue and total cost.
6. A government financial advisor has projected that the, cost of retrenchment compensation will
be at a rate of: r (t) = 10e0.5t million shillings per year t years from now. The government has
budgeted a maximum of
Ksh 300 million for retrenchment compensation fund.
When will this fund he exhausted.
7. A firm’s demand function is given as P=24 - 3x where p = price and x quantity produced and
sold.

Determine the output for maximum revenue & show it is a maximum. What’s the price at
maximum revenue?
8. The revenue function of a product is R= 28q - q2 and the unit variable cost v = q – 8 while
fixed cost is Sh 64
Required
(i)Total cost
(ii) Profit function
(iii)Output and price for maximum profit
(iv)Show that the output for maximum profit is not necessarily the same as the output for
maximum revenue.
TOPIC SIX: PROBABILITY THEORY

Objectives
By the end of the topic, the learner should be able to
 Define probability
 Use the formula for finding the probability of an event. to find the probabilities of events
with equally likely and non-equally likely outcomes.
 Determine the sample space of an experiment by examining each possible outcome.

 Describe the theory behind mutually exclusive and non-mutually exclusive events and
classify experiments accordingly.
 Evaluate the probability of mutually exclusive events by applying the addition rule.
Introduction
In the study of chance, we need a mathematical method to describe the likelihood of events
happening.
Probability is the study of chance (likelihood) of events happening.
The events are also referred to as outcomes. The study of probability has vitally important
applications in physical and biological sciences, economics, politics, sport, insurance, quality
control, planning in industry, and a host of other areas.
The range of probability
Probability is studied by assigning a number which lies between 0 and 1.
An event which a 0% chance of happening (“It did not rain on Tuesday” i.e., it is impossible) is
assigned a probability of 0.
An event which has a 100% chance of happening is assigned a probability of 1
All other events can then be assigned a probability between 0 and 1.
Definitions
Probability Experiment
Process which leads to well-defined results called outcomes
Outcome
The result of a single trial of a probability experiment .For example, in tossing of a coin, a head
or a tail constitute the two possible outcomes.
Sample Space
Set of all possible outcomes of a probability experiment It is denoted by ‘S’ and its number of
elements are n(s). For example; in throwing a dice, the number that appears on top is any one of
1, 2, 3,4,5,6. So here,
S = {1, 2, 3, 4, 5, 6} and n(s) = 6
Event
One or more outcomes of a probability experiment. In other words every subset of a sample
space is called an event and is denoted by ‘E’.

Example; In throwing a dice S = {1, 2, 3, 4, 5, 6}, the appearance of an even number will be the
event E = {2, 4, 6}.
Clearly, E is a subset of S.
Classical Probability
Uses the sample space to determine the numerical probability that an event will happen; also
called theoretical probability
Equally Likely Events
Events which have the same probability of occurring; for example, in tossing of a fair coin, the
appearance of a head or a tail are equally likely events.
Complement of an Event
All the events in the sample space except the given events.
Empirical Probability
Uses a frequency distribution to determine the numerical probability; an empirical probability is
a relative frequency.
Subjective Probability
Uses probability values based on an educated guess or estimate; it employs opinions and inexact
information.
Mutually Exclusive Events
Two events which cannot happen at the same time, for example in tossing a coin it is not
possible to obtain a head and a tail in a single toss. Similarly, events such as “It rained on
Tuesday” and “It did not rain on Tuesday” are mutually exclusive events. When calculating the
probabilities of mutually exclusive events you add up the probabilities.
Disjoint Events
Another name for mutually exclusive events
Independent Events
Two events are independent if the occurrence of one does not affect the probability of the other
occurring. For example the events “It rained on Tuesday” and “My chair broke at work” are two
independent events. When calculating the probabilities of independent events you multiply the
probabilities. If a coin is tossed twice, the two outcomes will be unrelated obtaining a head on
the first toss does not give a bearing on what will show up in the next toss.
Dependent Events

Two events are dependent if the first event affects the outcome or occurrence of the second event
in a way the probability is changed.
Conditional Probability
The probability of an event occurring given that another event has already occurred.
Bayes' Theorem
A formula which allows one to find the probability that an event occurred as the result of a
previous event
Axiomatic Approach to Probability
The modern theory of probability is based on the axiomatic approach introduced by the
Russianmathematician A.N Kolmogorov in 1930’s. In axiomatic approach, some concepts are
laid downat certain properties or postulates commonly known as axioms are defined and from
these axioms the entire theory is developed by logic of deduction.
Mutually exclusive events

Two or more events are called mutually exclusive if the occurrence of any one of them precludes
the occurrence of any of the others.
The probability of occurrence of two or more mutually exclusive events is the sum of the
probabilities of the individual events.
Sometimes when one event has occurred, the probability of another event is excluded (referring
the same given occasion or trial).
For example, throwing a die once can yield a 5 or 6, but not both, in the same toss. The
probability that either a 5 or 6 occurs is the sum of their individual probabilities.
P=p1+p2
=1/6+1/6
=1/3
Illustration: From a bag containing 5 white balls, 2 black balls, and 11 red balls, 1 ball is drawn.
What is the probability that it is either black or red?

Solution: The draw can be made in 18 ways. The choices are 2 black balls and 11 red balls,
which are favorable, or a total of 13 favorable choices. Then, the probability of success is
p=13/18
Since drawing a red ball excludes the drawing of a black ball, and vice versa, the two events are
mutually exclusive; so the probability of drawing a black ball is
p1=2/18and the probability of drawing a red ball is
p2=11/18
Therefore, the probability of success is
P1+p2
=2/18+11/18
=13/18
Illustration What is the probability of drawing either a king, a queen, or a jack from a deck of
playing cards?
Solution: The individual probabilities are
King =4/52
Queen =4/52
Jack =4/52
Therefore, the probability of success is
4/52+4/52+4/52
=12/52
=3/13
Illustration What is the probability of rolling a die twice and having a 5 and then a 3 show or
having a 2 and then a 4 show?
Solution: The probability of having a 5 and then a 3 show is
P1=1/6,1/6
=1/36
And the probability of having a 2 and then a 4 show is
1/6,1/6
=1/36

Then, the probability of either p1 or p2 is

1/36+1/36
=1/18
Practice problems:
1 When tossing a coin, you have what probability of getting either a head or a tail?
2. A bag contains 12 blue, 3 red, and 4 white marbles. What is the probability of drawing
a. in 1 draw, either a red or a white marble?
b. in 1 draw, either a red, white, or blue marble?
c. in 2 draws, either a red marble followed by a blue marble or a red marble followed by a red
marble?
3. What is the probability of getting a total of at least 10 points in rolling two dice? (HINT: You
want either a total of 10, 11, or 12.)
TOPIC SEVEN: CORRELATION AND REGRESSION ANALYSIS

Objectives
By the end of the topic learners should be able to:
 Describe the relationship between variables.
 Understand the types of correlation between variables.
 Calculate and interpret the product moment coefficient of correlation (r).
 Calculate the constants a and b using least squares.
Relationships between variables

There are frequently occasions in business when changes in one factor appear to be related
insome way to movements in one or several other factors. For example, a marketing manager
mayobserve that sales increase when there has been a change in advertising expenditure.
Thetransport manager may notice that as Vans and Lorries cover more miles then the need
formaintenance becomes more frequent.
Certain questions may arise in the mind of the manager or analyst. These may be summarized
asfollows:
a) Are the movements in the same pr in opposite directions?
b) Could changes in one phenomenon or variable be causing or be caused by movements inthe
other variable? (This is an important relationship known as a casual relationship).
c) Could apparently related movements come about purely by chance?
d) Could movements in one factor or variable be as a result of combined movements inother
factors or variables?
e) Could movements in two factors be related, not directly, but through movements in athird
variable hitherto to unnoticed?
f) What is the use of this knowledge anyway?
Very frequently, the manager or analysts interested in prediction of some kind. For example,
thequality control manager may want to know what might be the effect on the number of
faultyparts discovered if the amount of expenditure on inspection were increased. The sales
managermay wish to predict sales levels if advertising were increased by say 20%. Here there is
clearlysome kind of casual mode in the minds of the two managers.
Methodology
Suppose that a manager has sensed that two variables or phenomena are behaving in somerelated
way, how might that manager proceed to investigate the matter further? A possiblemethodology
might be as follows.
a) Observe and note what is happening in a systematic way
b) Form some kind of theory about the observed facts
c) Draw a graph or diagram of what is being observed
d) Measure what is happening

e) Use of results
This methodology is developed throughout this chapter and the various stages are
illustratedusing the problem shown in the example 1.
Example 1
Correlation
When the value of one variable is related to the value of another, they are said to be correlated.
Thus correlation means an inter-relationship or association. For example, there is likely to
become correlation between a person’s height and weight.
a) Variables may be;
b) Perfectly correlated (move in perfect unison)
c) Partly correlated (some inter-relationship but not exact)
d) Uncorrelated (no relationship between their movements)
Movements in one variable may cause movements in the same direction in the other variable.
This is known as positive correlation; an example being height and weight. Alternatively,
movement in one variable could cause change in the opposite direction in the other variables.
This is known as negative correlation. For example, if the price of an item is increased, then
fewer will be bought.
The degree of correlation between two variables can be measured and there are two measures of
correlation, denoted by r and R.a. The Product Moment Coefficient of Correlation, denoted by r.
This provides a measure of the strength of association between two variables; one of the
independent variable. R can range from +1, i.e. perfect positive correlation where the variables
change value in the same directions as each other, to -1 i.e. perfect negative correlation where
ydecreases linearly as x increases.
. The Rank Correlation Coefficient, denoted by R
This provides a measure of the association between two sets of ranked or ordered data. R canalso
vary from +1, perfect positive rank correlation to -1, perfect negative rank correlation.
Whichever type of coefficient is being used it follows that a coefficient of zero or near zero
generally indicates no correlation.
Product moment coefficient of correlation (r)
This coefficient gives an indication of the strength of the linear relationship between two
variables.

There are several possible formulae but a practical one is:
R= n∑xy-∑x∑y
n∑x^2-(∑x)^2 xn∑y2-(y)^2
This formula is used to find r from the data in example 1.

X Y X^2 Y^2 XY
15 60 2253600900
24 45 576 20251080
25 50 625 25001250
30 35 90012251050
35 42 1225 17641470
40 46 160021161840
45 28 202 7841260
65 204225400 1300
70224900484 1540
75 15 5625 225 1125
424363 21,926 15,123 12,815
Solution
R= 10x1840-424x363
10x21926-(424)^2x10x15123-(363)^2

R=-0.93
Thus the correlation coefficient is -0.93 which indicates a strong negative linear association
between expenditure on inspection and defective parts delivered. It will be seen that the formula
automatically produces the correct sign for the coefficient.
Note: a strong correlation between two variables would produce an r value in excess of +0.9 or
-0.9. If the value was less than, say 0.5 there would only be a very weak relationship between the
variables.
Least squares
To find the line of best fit mathematically it is necessary to calculate a line which minimizes the
total of the squared deviations of the actual observations from the calculated line. This is known
as the method of least squares or the least squares method of linear regression.
Least squares regression analysis gives equal importance to all the items in the time series, the
older and the more recent. Consequently if the data in the recent past were obtained from
conditions significantly different from long past conditions then it is unlikely that good forecasts
will be achieved using least squares regression analysis. It is because of this that forecasts based
on regression analysis should only be made for the near to medium term future.
Calculating the values of a and b
In the general form of the equation for a straight line
Y = a + bx
Where value a and b are constants and a represents the fixed element and b the slope of the line
i.e. the ratio of the vertical increase in y to horizontal increase in x.
To find a and b it is necessary to solve two simultaneous equations known as the Normal
Equations which are
an + bΣx= Σy……………..equation 1
aΣx+bΣx2=Σxy…………...equation 2
Where n= number of pairs of figures
Note: the slope of the line, b, is sometimes called the regression coefficient.
The use of these equations will be demonstrated using the Example 1 data contained in Table 1
The equations become
10a + 424b = 363

424a + 21,926b = 12,815

Solving gives a = 63.97 and b = - 0.65 to 2 decimal places
Therefore, the regression line for Example 1 is
Y = 63.97- 0.65x
Note: the Normal Equations automatically produce the correction sign (+ or -) for the regression
coefficient b; in this case, minus.
The calculated values can be used to draw the mathematically correct line of the best fit on a
graph. This is usually done by plotting based on three values of x. the lowest, highest and mean.
Based on example 1 the three values of x are 15, 42.4 and 75
Note: the values of a and b have been calculated in the example above by substituting in the
Normal Equations. An alternative is to transpose the Normal Equations so as to be able to find a
and b directively. The formulae are as follows:
a= ∑y- b∑ x
n
b=n ∑xy-∑ x ∑y
n∑ x^2 – (∑ x)^2
It is often more convenient to use these alternative forms especially when using a calculator.
Value for a and b are re - calculated using the transposed formulae and the table 1 data
b= 10x12, 815x 424x 363

10x 21,926 - (424) 2
b=0.65
a=363 -(0.65 424)

10
=63.86
Using the results of the regression analysis

When the values have been calculated for a and b, predictions forecasts can be made for values
of x which have not yet occurred. The predictions can be read from the graph on which the line
of best fit has been plotted or the values inserted into straight line formula.
Reverting to example 1 it will be recalled that the manager wished to know the likely number of
defects if 50 p per 1,000 was spent on inspection. From the figure of line of benefit it will be
seen that the number of defects would be 31 per 1,000. The formula can also be used thus:
y = 63.97- 0.65x
So when x is 50
y = 63.97- 0.65(50) = 31.47
Great care must be taken with any form of prediction otherwise absurd results may be obtained.
While any value of x can be used mechanically to make a prediction this does not necessarily
make a practical forecast. It is important to realize that any prediction, for example the 31.47
calculated above, is no more than a single or point estimate and like the use of sample means as
an estimate of the population mean, can be qualified by the use of a confidence interval.
Note; predictions outside the observed values are known as extrapolations predictions within the
observed range are known as interpolations.
TOPIC EIGTH:MEASURES OF CENTRAL TENDENCY

Measures of Central Tendency
These are statistical values which tend to occur at the Centre of any well-ordered set of data.
Whenever these measures occur they do not indicate the Centre of that data. These measures are
as follows:
i. The arithmetic mean
ii. The mode

iii. The median

iv. The geometric mean
v. The harmonic mean
1. The arithmetic mean

This is commonly known as average it is obtained by first of all summing up the values given
and by dividing the total value by the total no. of observations.
X
i.e. mean = n
Where x = no. of values – total
∑ = summation
n = no of observations
Example
The mean of 60, 80, 90, 120
60+ 80+ 90+ 120
4
350
=
4
= 87.5
The arithmetic mean is very useful because it represents the values of most observations in the
population.
The mean therefore describes the population quite well in terms of the magnitudes attained by
most of the members of the population
Computation of the mean from grouped Data i.e. in classes.

The following data was obtained from the manufacturers of electronic cells. A sample of
electronic cells was taken and the life spans were recorded as shown in the following table.
Life span hrs No. of cells (f) Class MP(x) X–A=d fd

1600 – 1799 25 1699.5 -600 -15000
1800 – 1999 32 1899.5 -400 -12800
2000-2199 46 2099.5 -200 -9200
2300 – 2399 58 2299.5(A) 0 0
2400 – 2599 40 2499.5 200 8000
2600 – 2799 30 2699.5 400 12000
2800 – 2999 7 2899.5 600 4200

A = Assumed mean, this is an arbitrary number selected from the data.
Arithmetic mean = assumed mean +

 fd 12800
= 2299.5 + 
 f 238
= 2299.5 +-53.78
= 2245.72 hours
Example 2 – (use of the coded method)

The following data was obtained from students who were registered in a certain college.
The table shows the age distribution
Age (yrs) No. of Students (f) mid points (x) x-a = d D/c = u fu
15 – 19 21 17 -15 -3 -63
20 – 24 35 22 -10 -2 -70
25 – 29 38 27 -5 -1 -38
30 – 34 49 32(A) 0 0 0
35 – 39 31 37 +5 + 31
40 – 44 19 42 +10 +2 38
193 -102
Required calculate the mean age of the students using the coded method
Actual mean = A(assumed mean) +

 fu c
f
102
= 32 + 5
193
= 29.36 years
NB. The following statistical terms are commonly used in statistical calculations. They must
therefore be clearly understood.
i) Class limits
These are numerical values which limits uq extended of a given class i.e. all the observations in a
given class are expected to fall within the interval which is bounded by the class limits e.g. 15 &
19 are class limits as in the table of the example above.
ii) Class boundaries

These are statistical boundaries, which separate one class from the other. They are usually
determined by adding the lower class limit to the next upper class limit and dividing by 2 e.g. in
19+ 20
the above table the class boundary between 19 and 20 is 19.5 which is = 2 .

iii) Class Mid points

This are very important values which mark the center of a given class. They are obtained by
adding together the two limits of a given class and dividing the result by 2.
iv) Class interval/width

This is the difference between an upper class boundary and lower class boundary. The value
usually measures the length of a given class.
2. The mode
- This is one of the measures of central tendency. The mode is defined as a value within a
frequency distribution which has the highest frequency. Sometimes a single value may not
exist as such in which case we may refer to the class with the highest frequency. Such a class
is known as a modal class
- The mode is a very important statistical value in business activities quite often business
firms tend to stock specific items which are heavily on demand e.g. footwear, clothes,
construction materials (beams, wires, iron sheets e.t.c.
- The mode can easily be determined form ungrouped data by arranging the figures given
and determining the one with the highest frequency.
- When determining the values of the mode from the grouped data we may use the
following methods;-
i. The graphical method which involves use of the histogram
ii. The computation method which involves use of formula
Example
In a social survey in which the main purpose was to establish the intelligence quotient (IQ) of
resident in a given area, the following results were obtained as tabulated below:
IQ No. of residents Upper class bound CF

1 – 20 6 20 6
21 – 40 18 40 24
41 – 60 32 fo 60 56
61 – 80 48 f1 80 104
81 – 100 27 f2 100 131
101 – 120 13 120 144
121 – 140 2 140 146
Required
Calculate the modal value of the IQ’s tabulated above using
i. The graphical method and
ii. Formulae

Graphical method
50
40
30
20
10
20 40 60 80 100 120 140

Value of the mode
Computation method
 f1  f 0 
Mode = L +   ×c
 2f1  f 0  f 2 
Where L = Lower class boundary of the class containing the mode
f0 = Frequency of the class below the modal class
f1 = Frequency of the class containing the mode
f2 = frequency of the class above the modal class
c = Class interval
  48 - 32  
Therefore Mode = 60.50 +   × 20
 2  48  - 32 - 27 
= 69.14
3. The median
- This is a statistical value which is normally located at the center of a given set of data which
has been organized in the order of magnitude or size e.g. consider the set 14, 17, 9, 8, 20, 32,
18, 14.5, 13. When the data is ordered it will be 8, 9, 13, 14, 14.5, 17, 18, 20, 32
The middle number/median is 14.5
- The importance of the median lies in the fact that it divides the data into 2 equal halves. The
no. of observations below and above the median are equal.
- In order to determine the value of the median from grouped data. When data is grouped the
median may be determined by using the following methods

i. Graphical method using the cumulative frequency curve (ogive)

ii. The formula
Example
Referring to the table in 105, determine the median using the methods above
The graphical method
IQ No of resid UCB Cumulative Frequency

0 – 20 6 20 6
20 – 40 18 40 24
40 – 60 32 60 56
60 – 80 48 80 104
80 – 100 27 100 131
100 – 120 13 120 144
120 – 140 2 140 146
146
xv
160
140
120
100
80
60
40
20
20 40 60 80 100 120 140 160
Value of the median

n+1 146+1
The position of the median = =
2 2
ii Computation
The formula used is

 n+1 
 2  Cfbm 
Median = L +   ×c
 cfmc 
 
Where L = Lower class boundary of the class containing the median
N = No of observations
Cfo= cfbm = Cumulative frequency of the class before that containing
the median
F1 fmc = Frequency of the class containing the median
n+1
- Cfbm
Therefore median = L + 2
cfmc
73.5 - 56
= 60 + × 20
48
= 60 + 7.29
= 67.29
4. Geometric mean
- This is a measure of central tendency normally used to measure industrial growth rates.
- It is defined as the nth root of the product of ‘n’ observations or values
i.e. GM = n x1 × x 2 ×... × x n
-
Example
In 1995 five firms registered the following economic growth rates; 26%. 32% 41% 18% and
36%.
Required
Calculate the GM for the above values
GM = 5 26× 32× 41× 18× 36
5
= 1 Log26 + Log32 + Log41 + Log18 + Log26
No. Log
26 1.4150
32 1.5052
41 1.6128
18 1.2533
36 1.5563
7.3446
Therefore Log of GM = 1/5 x 7.3446 = 1.46892
So GM = Antilog of 1.46892
= 29.43
5. Harmonic mean
This is a measure of central tendency which is used to determine the average growth rates for
natural economies. It is defined as the reciprocal of the average of the reciprocals of all the
values given by HM.
1
HM =
1 ( 1 + 1 +..... 1
n x1 x2 xn
Example
The economic growth rates of five countries were given as 20%, 15%, 25%, 18% and 5%
Calculate the harmonic mean
1
The HM =
1 (1 + 1 + 1 + 1 + 1
5 20 15 25 10 5
1
=
0.2(0.05+ 0.07+ 0.04 + 0.10+ 0.2)
1
=
0.092
10.86%
6. Weighted mean
- This is the mean which uses arbitrarily given weights
- It is a useful measure especially where assessment is being done yet the conditions prevailing
are not the same. This is particularly true when assessment of students is being done given
that the subjects being taken have different levels of difficulties.
Examples
The following table shows that marks scored by a student doing section 3 and 4 of CPA
Subject Scores (x) Weight (w) wx

STAD 65 50 3250
BF 63 40 2520
FA2 62 45 2340

LAW 80 35 2800
QT 69 55 3795
FA3 55 60 3300
w = 285 wx = 18005
Weighted mean
Ewx
Ew
18005

285
 63.17%
Merits and demerits of the measures of central tendency

The arithmetic mean
Merits
i. It utilizes all the observations given
ii. It is a very useful statistic in terms of applications. It has several applications in
business management e.g. hypothesis testing, quality control e.t.c.
iii. It is the best representative of a given set of data if such data was obtained from a
normal population
iv. The a.m. can be determined accurately using mathematical formulas
Demerits of the A.M.

i. If the data is not drawn from a ‘normal’ population, then the a.m. may give a wrong
impression about the population
ii. In some situations, the a.m. may give unrealistic values especially when dealing with
discrete variables e.g. when working out the average no. of children in a no. of
families. It may be found that the average is 4.4 which is unrealistic in human beings
The mode
Merits
i. It can be determined from incomplete data provided the observations with the highest
frequency are already known
ii. The mode has several applications in business
iii. The mode can be easily defined
iv. It can be determined easily from a graph
Demerits
i. If the data is quite large and ungrouped, determination of the mode can be quite
cumbersome

ii. Use of the formula to calculate the mode is unfamiliar to most business people
iii. The mode may sometimes be non existentsor there may be 2 mode for a given set of
data. In such a case therefore a single mode may not exist
The median
Merits
i. It shows the centreof a given set of data
ii. Knowledge of the determination of the median may be extended to determine the
quantities
iii. The median can easily be defined
iv. It can be obtained easily from the cumulative frequency curve
v. It can be used in determining the degrees of skew ness see later
Demerits
i. In some situations where the no. of observations is even, the value of the median
obtained is usually imaginary
ii. The computation of the median using the formular is not well understood by most
business men
iii. In business environment the median has got very few applications
The geometric mean

Merits
i. It makes use of all the values given
ii. It is the best measure for industrial growth rates
Demerits
i. The determination of the GM by using logarithms is not familiar process to all those
expected to use it manager
ii. If the data contains zeros or –vevalues, the GM ceases to exist
The harmonic mean and weighted mean

Merits – same as the arithmetic mean
Demerits – same as the arithmetic mean
Measures of Dispersion
- The measures of dispersion are very useful in statistical work because the indicate
whether the rest of the data are scattered around the mean or away from the mean.
- If the data is approximately dispersed around the mean then the measure of dispersion
obtained will be small therefore indicating that the mean is a good representative of the
sample data. But on the other hand, if the figures are not closely located to the mean then
the measures of dispersion obtained will be relatively big indicating that the mean does
not represent the data sufficiently
- The commonly used measures of dispersion are

a) The range
b) The absolute mean deviation
c) The standard deviation
d) The semi – interquartile and quartile deviation
e) The 10th and 90th percentile range
f) Variance
a) The range
- The range is defined as the difference between the highest and the smallest values in a
frequency distribution. This measure is not very efficient because it utilizes only 2 values
in a given frequency distribution. However the smaller the value of the range, the less
dispersed the observations are from the arithmetic mean and vice versa
- The range is not commonly used in business management because 2 sets of data may
yield the same range but end up having different interpretations regarding the degree of
dispersion
Qualities of a good average

The measurement of the values around which the data is scattered is known as measures of
central tendency or averages. The qualities of a good average are as follows: -
 It shall be rigidly defined
 It should be based on all values
 It should be easily understood and calculated
 It should be least affected by the fluctuations of sampling.
 It should be capable of further algebraic or statistical treatment / or analysis.
 It should be least affected by extreme values.
b) The absolute mean deviation

- This is a useful measure of dispersion because it makes use of all the values given see the
following examples
Example 1
In a given exam the scores for 10 students were as follows
Student Mark (x) x-x
A 60 1.8
B 45 16.8
C 75 13.2
D 70 8.2
E 65 3.2
F 40 21.8
G 69 7.2
H 64 2.2
I 50 11.8
J 80 18.2
618 104.4

Required
Determine the absolute mean deviation
618
Mean, x’ = 10 = 61.8
 / X - X/ 104.4
= = 10.44
Therefore AMD = N 10
Example 2
The following data was obtained from a given financial institution. The data refers to the loans
given out in 1996 to several firms
Firms (f) Amount of loan fx [x-x’] F[x-x]

per firm (x)
3 20000 60000 4157.9 12473.70
4 60000 240000 35842.1 143368.40
1 15000 15000 9157.9 9157.9
5 12000 60000 12157.9 60789.50
6 14000 84000 10157.9 60947.40
Σf = 19 Σfx = 459000 Σf/x –x’/ 286736.90
Required
Calculate the mean deviation for the amount of items given
 fx 459,000
X' = = = 24157.9
f 19
 / X - X'/ 286736.90
 AMD = =
f 19
= Shs 15,091.40
NB if the absolute mean deviation is relatively small it implies that the data is more compact and
therefore the arithmetic mean is a fair sample representative.
c) The standard deviation

- This is one of the most accurate measures of dispersion. It has the following advantages;
i. It utilizes all the values given
ii. It makes use of both negative and positive values if they occur

iii. The standard deviation reflects an accurate impression of how much the sample data
varies from the mean. This is because its suitability can also be tasted using other
statistical methods
Example
A sample comprises of the following observations; 14, 18, 17, 16, 25, 31
Determine the standard deviation of this sample
Observation.
x [x-x’)2
14 37.21
18 4.41
17 9.61
16 16.81
25 24.01
31 118.81
121 210.56
121
X' = = 20.1
6
∑ ( x −x ' ) 2 = 286736. 90
∴ standard deviation,
σ=
√ n 6
= 5.93
Alternative method
x X2
14 196
18 324
17 289
16 256
25 625
31 961
121
∑ ( x2) − ∑ ( x )2 = 286736 .90

σ=
√ n
265 .1 ( 121 )
n
2
6
−
= 6 6
= 5.93
Example 2

The following table shows the part-time rate per hour of a given no. of laborers in the month of
June 1997.
Rate per hr (x) No. of labourers Fx Fx2

Shs (f)
230 7 1610 370300
400 6 2400 960000
350 2 700 245000
450 1 450 202500
200 8 1600 320000
150 11 1100 247500
35 8410 2345300
Calculate the standard deviation from the above table showing how the hourly payment were
varying from the respective mean
 fx -  fx
2 2
∴standard deviation, σ = f f
2345300  8410 
2
-
= 35 35
= 67008.6  577372
= 9271.4
= 96.29
Example 3 – Grouped data

In business statistical work we usually encounter a set of grouped data. In order to determine the
standard deviation from such data, we use any of the three following methods
i. The long method
ii. The shorter method
iii. The loaded method
The above methods are used in the following examples
Example 3.1
The quality controller in a given firm had an accurate record of all the iron bars produced in may
1997. The following data shows those records
i. Using long method

Bar lengths No. of bars(f) Class mid point fx Fx2

(cm) (x)
201 – 250 25 225.5 5637.5 1271256.25
251 – 300 36 275.5 9918 2732409
301 – 350 49 325.5 15949.5 5191562.25
351 – 400 80 375.5 30040 11280020
401 – 450 51 425.5 21700.5 9233562.75
451 – 500 42 475.5 19971 9496210.50
501 - 550 30 525.5 15765 8284507.50
313 118981.50 47489526
Calculate the standard deviation of the lengths of the bars
 fx -   fx
2
2
∴standard deviation, σ = f f
47489526 118981.50
-
= 313 313
= 84.99 cm
ii. Using the shorter method
Bar lengths No. of mid point x-A = d fd Fd2

(cm) bars(f) (x)
201 – 250 25 225.5 -150 -3750 562500
251 – 300 36 275.5 -100 -3600 360000
301 – 350 49 325.5 -50 -2450 122500
351 – 400 80 375.5 (A) 0 0 0
401 – 450 51 425.5 50 2550 127500
451 – 500 42 475.5 100 4200 420000
501 - 550 30 525.5 150 4500 675000
313 1450 2267500
Calculate the standard deviation using the shorter method
  fd 
2
 fd 2

∴ Standard deviation, σ = f f
2267500  1450 
2

= 313 313

= 7244.40  21.50
= 7222.90
= 84.99 cm
iii. Using coded method
Bar lengths (f) mid point (x) x-A = d d/c = u fu fu2

(cm)
201 – 250 25 225.5 -150 -3 -75 225
251 – 300 36 275.5 -100 -2 -72 144
301 – 350 49 325.5 -50 -1 -49 49
351 – 400 80 375.5 (A) 0 0 0 0
401 – 450 51 425.5 50 1 51 51
451 – 500 42 475.5 100 2 84 168
501 - 550 30 525.5 150 3 90 270
313 29 907
C = 50
Standard deviation using the coded method. This is the most preferable method among the three
methods
 fu -   fu 
2
2
σ =c× f f
907  29 
2

= 50 × 313 313
= 50 × 1.6997
= 84.99
Variance
Square of the standard deviation is called variance.
d) The semi interquartile range

-This is a measure of dispersion which involves the use of quartile. A quartile is a

mark or a value which lies at the boundary of a division when any given set of data is
divided into four equal divisions
- Each of such divisions normally carries 25% of all the observations
- The semi interquartile range is a good measure of dispersion because it shows how
the rest of the data are generally spread around the mean
- The quartiles normally used are three namely;
i. The lower quartile (first quartile Q1) this usually binds the lower 25% of the data
ii. The median (second quartile Q2)
iii. The upper quartile (third quartile Q3)
The semi quartile range,
Q3 - Q1
SIR =
2
Example 1
The weights of 15 parcels recorded at the GPO were as follows:
16.2, 17, 20, 25(Q1) 29, 32.2, 35.8, 36.8(Q2) 40, 41, 42, 44(Q3) 49, 52, 55 (in kgs)
Required
Determine the semi interquartile range for the above data
Q3  Q1 44 - 25 19
SIR = = = = 8.5
2 2 2
Example 2 (Grouped Data)

The following table shows the levels of retirement benefits given to a group of workers in a
given establishment.
Retirement benefits £ No of retirees UCB cf

‘000 (f)
20 – 29 50 29.5 50
30 – 39 69 39.5 119
40 – 49 70 49.5 189
50 – 59 90 59.5 279
60 – 69 52 69.5 331
70 – 79 40 79.5 371
80 – 89 11 89.5 382
Required
i. Determine the semi interquartile range for the above data
ii. Determine the minimum value for the top ten per cent.(10%)
iii. Determine the maximum value for the lower 40% of the retirees

Solution
The lower quartile (Q1) lies on position
N+1 382 + 1
=
4 4
= 95.75
(95.75 - 50)
 the value of Q1 = 29.5 + x 10
69
= 29.5 + 6.63
= 36.13
The upper quartile (Q3) lies on position

N+1
4
382 + 1
=
4
= 287.25
 287.25 - 279
∴the value of Q3 = 59.5 + 52 × 10
= 61.08
Q3 - Q1
The semi interquartile range = 2
61.08 - 36.13
=
2
= 12.475
= £12,475
ii. The top 10% is equivalent to the lower 90% of the retirees
The position corresponding to the lower 90%
90
= (n + 1) = 0.9 (382 + 1)
100

= 0.9 x 383
= 344.7
∴the benefits (value) corresponding to the minimum value for top 10%
 344.7 - 331
= 69.5 + 40 x 10
= 72.925
= £ 72925
iii. The lower 40% corresponds to position

40
= 100 (382 + 1)
= 153.20
∴Retirement benefits corresponding to its position
 153.2 -119
= 39.5 + 70 x 10
= 39.5 + 4.88
= 44.38
= £ 44380
e. The 10th – 90th percentile range

This is a measure of dispersion which uses percentile. A percentile is a value which separates
one division from the other when a given data is divided into 100 equal divisions.
This measure of dispersion is very important when calculating the co-efficient of skew ness (see
later)
Example
Using the above data for retirees calculate the 10 th = 90th percentile. The tenth percentile 10th
percentile lies on position
10
100 (382 + 1) = 0.1 x 383
= 38.3

∴the value corresponding to the tenth percentile
(38.3 x 10)
= 19.5 +
50
= 19.5 + 7.66
= 27.16
The 90th percentile lies on position
90
(382 + 1) = 0.9 x 383
100
= 344.7
∴the value corresponding to the 90th percentile
 344.7 - 331
= 69.5 + 40 x 10
= 69.5 + 3.425
= 72.925
∴The required value of the 10th – 90th percentile = 72.925 – 27.16 = 45.765
Revision Exercise
1. For the set of {8, 4, 2, 10, 2, 5, 9, 12, 2, 6}
(a) Calculate the mean;
(b) Find the mode;
(c) Find the median.
2. The table below shows the relative Relative

frequencies of the ages of the frequency
students at Lisuvila High School. Age
(in years)
13 0.11
14 0.30
15 0.23

16 0.21
17 0.15
Total 1
(a) If a student is randomly selected from this school, find the probability that
(i) The student is 15 years old;
(ii) The student is 16 years of age or older.
There are 1200 students at Lisuvila High School.

The average tuition price of two colleges in Georgia is $7,700. In New York, the average tuition
price of three colleges is $9,400. What is the weighted mean tuition price for all colleges
together?
"Elaine gets quiz grades of 79, 82, and 69. She gets a 65 on her final exam. Find the weighted
mean if the quizzes each count for 10% and the final exam counts for 70% of the final grade.
5. Average cost of 5 pencils and 4 rubbers is Rs. 36. The average cost of 7 apples and 8 mangoes
is Rs. 48. What is the total cost of 24 apples and 24 mangoes?
6. What are the special uses of G.M. and H.M.?
Calculate G.M. and H.M. for the 0—10 10—20 20—30 30—40 40—50
following data : Value :
Frequency : 8 12 20 6 4
(Ans.: 49)
What are the special uses of G.M. and H.M.?
7. A person walks 8 km. at 4 km. an hour, 6 km. at 3 km. an hour and 2 kms. at 4 km. an hour.
Find his average speed per hour
8. Draw a histogram for the following data and locate the mode:

Marks : 0—10 10—20 20—30 30—40 40—50 50—60 60—70 70—

Frequency: 4 10 16 22 20 18 8 2
(Ans.: Mode = 36)
(a) Write down the value of w.
(b) Draw and label the Cumulative Frequency graph for this data
9. (a) A man travels first 900 kms. Of his journey by train at an average speed of 80 kms. Per
hour, next 2,000 kms. By plane at an average speed of 300 kms. Per hour and finally, 20 kms. By
Taxi at an average speed of 30 kms. Per hour. What is his average speed for the entire journey?
(Ans.: 157.24)

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Frontier institute of professional & mangt’studies -Garissa

FRONTIER INSTITUTE OF PROFESSIONAL AND MANAGEMENT STUDIES

FULLY REGISTERED WITH THE MINISTRY OF EDUCATION, SCIENCE

‘Next Level in Your Career’

Garissa Main Office Wajir Branch Moyale Branch

Prepared by Mr. Kiarie Page 1

Prepared by Mr. Kiarie Page 2

1 INTRODUCTION TO Q.T -operational research

Prepared by Mr. Kiarie Page 3

-qualities of a good average

TOPIC ONE: INTRODUCTION TO QUANTITATIVE TECHNIQUES

By the end of the topic learners should be able to

Prepared by Mr. Kiarie Page 4

 Describe the principles of a model-based approach.

Operational Research definition

Essential features of the OR approach

 Application of a model-based scientific approach.

Application of a model-based approach

An example of a simple mathematical model familiar to accountants could be the following

Prepared by Mr. Kiarie Page 5

a = Fixed overheads per period

b = Variable overheads per unit (assumed to be constant)

x = Number of units produced

Analogue, simulation and Heuristic sometimes have applicability.

Prepared by Mr. Kiarie Page 6

Systems approach to organization

Prepared by Mr. Kiarie Page 7

Recognition of risk and uncertainty

Assistance to management decision making and control

Prepared by Mr. Kiarie Page 8

1. Define operational research

2. What are the essential features of the Operational Research Approach?

3. How does operational research assist management decision making?

4. What are the stages in an operational research study?

TOPIC TWO: EQUATIONS AND INEQUALITIES

By the end of the topic the learner should be able to

 Identify different types of variables

Prepared by Mr. Kiarie Page 9

 Solve linear equations

 Solve linear inequalities

 Represent linear inequalities graphically.

It is a statement showing the equality of two expressions.

For any real numbers a, b and c

1. Addition property: If a=b, then a+ c= b + c

2. Subtraction property:If a=b, then a- c= b - c

3. Multiplication property: If a=b, then ac = bc

4. Division property:If a=b, then a/c = b/c

Terms used in equations

Prepared by Mr. Kiarie Page 10

the equation, 4x3 +2x + 3 has an index or power 3.

It is a variable that a researcher manipulates in order to determine its effect or influence on

Types of independent variables

2. Dependent variables / criterion variables

Prepared by Mr. Kiarie Page 11

6. Control variables / concomitant / covariate or blocking variables

There are three major types of equations. They include:-

(a) Linear / simple equations

(b) Quadratic equations

(c) Simultaneous equations

For this topic, we shall only deal with linear equations.

Linear / simple equations

Example 1: Solve for x in the following equation.

Prepared by Mr. Kiarie Page 12