BUSINESS MATHEMATICS AND STATISTICS (523

)

DIFFERENTIATION & ITS APPLICATION IN BUSINESS

Submitted by:

(AH524979)

ACKNOWLEDGEMENTS
First of all I would be thankful to Allah Almighty without whose blessing and mercies I were not able to complete this project. This project is refined from splendid efforts of many people who contributed regardless of any reward. I thank them from the core of our hearts. May Allah give them success by leaps and bounds. I can‟t forget the guidance‟s and knowledge which our kind teachers have provided us. We were lucky to have such a kind teacher who taught us and with such devotion and zest, which I could never forget. I thank her from the core of my heart. In the end we would like to thank to all those people who provided me with useful suggestions, useful data and facility of composing.

ABSTRACT
During the past four decades Pizza Hut has built a reputation for excellence that has earned the respect of consumers and industry experts alike. Building a leading pizza company has required relentless innovation, commitment to quality and dedication to customer service and value. The qualities of entrepreneurship, growth and leadership have characterized Pizza Hut‟s business through more than four decades of success. Through the strength of its heritage, its culture and its people and franchisees, Pizza Hut looks forward to more success in future. There are different objectives of every organization. In order to achieve these objectives different targets are set. Targets pass down the hierarchy depending on the nature of the business. Therefore, in order to achieve the objectives, management decides on different strategies. These strategies are divided into many sub-parts and are useful for the running of the business. The employees and the management know what they have to achieve through the targets which have been set to them and the strategies they have adopted help them know the way they will achieve the objectives. Similarly, Pizza Hut has different targets set to them and they have adopted different strategies to successfully achieve the targets set. These targets are set by the RSC i.e. the restaurant support centre in Karachi. These targets are passed on to the RGM (restaurant general manager) and he passes them to the workforce. These targets fall within the organizational structure in which there are many people who have different targets to achieve. In order to successfully achieve the targets they need to co-operate and work in a friendly environment.

TABLE OF CONTENTS
Introduction to the Topic .............................................................................................................................. 1 1.1 1.2 1.3 Derivative ...................................................................................................................................... 1 Differentiation............................................................................................................................... 2 Laws of Differentiation.................................................................................................................. 3 Power Rule ............................................................................................................................ 3 Constant-Multiple Rule ......................................................................................................... 4 Sum Rule ............................................................................................................................... 4 Chain Rule ............................................................................................................................. 4 Product of two funtions ........................................................................................................ 5 Quotient Rule ........................................................................................................................ 5

1.3.1 1.3.2 1.3.3 1.3.4 1.3.5 1.3.6 1.4

Application of Differentiation ....................................................................................................... 5 Marginal Analysis .................................................................................................................. 5 Marginal Profit – Cost and Revenue ..................................................................................... 6 Breakeven Analysis ............................................................................................................... 6 Profit Maximization and Cost Minimization analysis ............................................................ 7

1.4.1 1.4.2 1.4.3 1.4.4

Practical Study............................................................................................................................................... 8 Introduction to Pizza Hut .............................................................................................................................. 8 2.1 2.2 2.3 2.4 2.5 History ........................................................................................................................................... 8 Mission Statement ........................................................................................................................ 9 Pizza Hut future in Pakistan ........................................................................................................ 10 Pizza Hut Products ...................................................................................................................... 10 Marginal Cost Analysis ................................................................................................................ 10 Cost Analysis of Small Pizzas ............................................................................................... 11 Cost Analysis of Regular Pizzas ........................................................................................... 12 Cost Analysis of Large Pizzas ............................................................................................... 12

2.5.1 2.5.2 2.5.3 2.6

Application of Cost Function ....................................................................................................... 13

Data Collection Methods ............................................................................................................................ 14 SWOT Analysis............................................................................................................................................. 15 4.1 4.2 Strengths ..................................................................................................................................... 15 Weaknesses ................................................................................................................................ 15

4.3 4.4

Opportunities .............................................................................................................................. 16 Threats ........................................................................................................................................ 16

Conclusion ................................................................................................................................................... 17 Recommendations ...................................................................................................................................... 18 References .................................................................................................................................................. 19

Assignment II – Business Mathematics & Statistics (523)

INTRODUCTION TO THE TOPIC
1.1 DERIVATIVE
In calculus, a branch of mathematics, the derivative is a measure of how a function changes as its input changes. Loosely speaking, a derivative can be thought of as how much one quantity is changing in response to changes in some other quantity; for example, the derivative of the position of a moving object with respect to time is the object's instantaneous velocity. Conversely, the integral of the object's velocity over time is how much the object's position changes from the time when the integral begins to the time when the integral ends. The derivative of a function at a chosen input value describes the best linear approximation of the function near that input value. For a real-valued function of a single real variable, the derivative at a point equals the slope of the tangent line to the graph of the function at that point. In higher dimensions, the derivative of a function at a point is a linear transformation called the linearization. A closely related notion is the differential of a function.

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Assignment II – Business Mathematics & Statistics (523)

1.2 DIFFERENTIATION
The process of finding a derivative is called differentiation. The reverse process is called antidifferentiation. The fundamental theorem of calculus states that anti-differentiation is the same as integration. Differentiation and integration constitute the two fundamental operations in singlevariable calculus.i Differentiation is a method to compute the rate at which a dependent output y changes with respect to the change in the independent input x. This rate of change is called the derivative of y with respect to x. In more precise language, the dependence of y upon x means that y is a function of x. This functional relationship is often denoted by:

y = ƒ(x)
Where ƒ denotes the function. If x and y are real numbers, and if the graph of y is plotted against x, the derivative measures the slope of this graph at each point. The simplest case is when y is a linear function of x, meaning that the graph of y against x is a straight line. In this case,

y = ƒ(x) = m x + b
For real numbers m and b, and the slope m is given by

where the symbol Δ (the uppercase form of the Greek letter Delta) is an abbreviation for "change in." This formula is true because

y + Δy = ƒ(x+ Δx) = m (x + Δx) + b = m x + b + m Δx = y + m Δx.
It follows that Δy = m Δx.

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Assignment II – Business Mathematics & Statistics (523) This gives an exact value for the slope of a straight line. If the function ƒ is not linear (i.e. its graph is not a straight line), however, then the change in y divided by the change in x varies: differentiation is a method to find an exact value for this rate of change at any given value of x. The idea, illustrated by Figures 1-3, is to compute the rate of change as the limiting value of the ratio of the differences Δy / Δx as Δx becomes infinitely small. In Leibniz's notation, such an infinitesimal change in x is denoted by dx, and the derivative of y with respect to x is written

suggesting the ratio of two infinitesimal quantities. (The above expression is read as "the derivative of y with respect to x", "d y by d x", or "d y over d x". The oral form "d y d x" is often used conversationally, although it may lead to confusion.) The most common approach to turn this intuitive idea into a precise definition uses limits, but there are other methods, such as non-standard analysis.

1.3 LAWS OF DIFFERENTIATION
Some basic laws of differentiation are:

1.3.1 POWER RULE
If f(x) = xr then f '(x) = r * x(r-1) For example: If f(x) = x2 We multiply the function (x2) by the power (2) and then subtract one from the power (2-1) f '(x) = 2 * x(2-1) = 2x [Note: „*‟ represents the sin of multiplication in the examples]

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Assignment II – Business Mathematics & Statistics (523)

1.3.2 CONSTANT-MULTIPLE RULE
If y = k * f(x), where K is a constant, then For example: f(x) = 5x4 Using Constant multiple Rule, we just rewrite the 5, and solve the rest of the function (x4) using power rule. Then once we get the answer, we multiply it by the 5 from the original problem. f '(x) = 5 * 4 * x(4-1) = 5 * 4 * x3 = 20x3

1.3.3 SUM RULE
If y = f(x) + g(x), then For example: f(x) = 6x3 + 4x2 We treat each part of the function individually. First we take the derivative of 6x3 using power and constant-multiplier rule and then do the same for 4x2. Then we add the two derivatives together. f '(x) = 6 * 3 * x(3-1) + 4 * 2 * x(2-1) = 18x2 + 8x

1.3.4 CHAIN RULE
If y = (x) r, then For example: f(x) = (5x2 + 3)2 This is a two step problem. We "ignore" the "inner" part of the function, which is (5x2 + 3). And we use power rule, multiplying the function by the power (2) and subtracting one from the power, but we leave the inside the same. 2 * (5x2 + 3)1 (The First Part) 4|Page

Assignment II – Business Mathematics & Statistics (523) Next we must now look at the "inner" part of the function and take the derivative of that (5x2 + 3) = 2 * 5x = 10x (The Second Part) To get the answer, we write (The First Part) multiplied by (The Second Part) f'(x) = (5x2 + 3)2 =2 * (5x2 + 3) * 10x = 20x * (5x2 + 3)

1.3.5 PRODUCT OF TWO FUNTIONS
If then

1.3.6 QUOTIENT RULE

It is also known as the division rule. If

then

1.4 APPLICATION OF DIFFERENTIATION
Derivation is quite helpful in day to day activities. Many organizations retrieve date from derivatives for decision making. Marginal Analysis is used to see different changes in data by some change in actions.

1.4.1 MARGINAL ANALYSIS
Economists look at how costs and benefits change as there are small changes in actions, this is called marginal analysis. It is an acknowledgement that people (should) make a decision based on the incremental gains and losses that result from that decision, and that sunk costs (money, time or other things of worth already expended and unredeemable) should not matter.ii Marginal analysis, quite simply, balances the additional benefits from an action against the additional cost. In any case, be it a firm deciding whether or not to expand production, a student deciding if another beer is a good idea, or a professor choosing to give an extra exam, optimal 5|Page

Assignment II – Business Mathematics & Statistics (523) performance requires that benefits and costs be equilibrated on the margin. What this means is that if the additional benefit exceeds the additional cost, take the action. Keep taking it as long as the benefit exceeds the cost, and to ensure that all excess benefits (those that exceed costs) are accrued, do it until for the last action, the benefits just equal the costs. Let be the revenue for a production , the cost, and the profit. Theniii

And the marginal profit for the

th unit is defined by:

Where

,

, and

are the derivatives of

,

, and

, respectively.

1.4.2 MARGINAL PROFIT – COST AND REVENUE
Marginal profit is the derivative of the profit function. We use this marginal profit function to estimate the amount of profit from the “next” item. Marginal cost is the derivative of the cost function. We use this marginal cost function to estimate the amount of unit product. Marginal revenue is the derivative of the revenue function. We use this marginal revenue function to estimate the amount of revenue from the “previous” results.

1.4.3 BREAKEVEN ANALYSIS
Derivatives help in analyzing the breakeven point. In presence of the profit function, the breakeven point is found. For example: P(x) = y = 8x – 0.02 x2 – 500 P‟(x) = = 8 – 0.04x

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Assignment II – Business Mathematics & Statistics (523) This is the Marginal Profit (MP) function. Now we know that at a breakeven point the profit and loss, both are equal to Zero. Therefore, we place the value of P‟(x) = 0 in the equation. P‟(x) = 0 = 8 – 0.04 x x = 8 ÷ 0.04 = 200 When x=200, that will be the point where we have no profit and no loss situation, i.e. the breakeven point.

1.4.4 PROFIT MAXIMIZATION AND COST MINIMIZATION ANALYSIS
Derivation helps in analyzing if the profit point in positive or negative. For example: P(x) = y = 8x – 0.02 x2 – 500 P‟(x) = = 8 – 0.04x

This is the Marginal Profit (MP) function. Now the critical point will be: P‟(c) = 0 = 8 – 0.04 c c = 8 ÷ 0.04 = 200 This C is the critical point that means either the profit will increase or decrease after this point. If the profit is decreasing after the point, then it is called Negative Profit, and if the profit is increasing after the point then it is Positive Profit. To check if the profit is negative or positive, second derivative of the equation is taken and the value of critical point is put in place of x. If the answer is negative, then the profit is negative, other wise positive. P‟‟(x) = = 0 – 0.04 = -0.04

Since the second derivative is negative, this means that the profit after the critical point 200, will decrease, therefore the profit will be negative after the critical point.

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Assignment II – Business Mathematics & Statistics (523)

PRACTICAL STUDY

INTRODUCTION TO PIZZA HUT
Pizza Hut is one of the flagship brands of Yum! Restaurant Int. which also has KFC, Taco Bell, A&W and Long John Silver‟s under its umbrella. It is the world‟s largest pizza chain with over 12,500restaurants across 91 countries. Pizza Hut was started in 1958,by two brothers Frank and Dan Carney in Wichita, Kansas. They had the idea to open a pizza parlor. They borrowed $600 from their mother, and opened the very first Pizza Hut. In 1959, the first franchise unit opened in Topeka, Kansas. Almost ten years later,Pizza Hut was serving one million customers a week in their 310 locations. In 1970, Pizza Hut was put on the New York Stock Exchange under the ticker symbol PIZ. In 1986, Pizza Hut introduced delivery service, something no other restaurant was doing. By the 1990's Pizza Hut sales had reached $4 billion worldwide. In 1998, Pizza Hut celebrated their 40th anniversary, and launched their famous campaign "The Best Pizzas Under One Roof." In 1996, Pizza Hut sales in the United States were over $5 million. The first Indian outlet was opened in June 1996 in Bangalore. In India, Pizza Hut has 139 restaurants across 36 cities. Pizza Hut has been voted the “best family restaurant” for the second year running at the 2007 Tommy‟s Parent Friendly Awards. "Pizza Hut is known for quality, innovation and category leadership.

2.1 HISTORY
1958 Frank and Dan Carney open the first Pizza Hut in Wichita, Kansas. 1972 1000 restaurants are open throughout the USA.

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Assignment II – Business Mathematics & Statistics (523) 1973 Pizza Hut went international with restaurants in Japan, Canada & England. The first UK Pizza Hut opened in Islington, London. 1977PepsiC o bought Pizza Hut. 1980 Pan Pizza was introduced. 1982 The UK joint venture started between PepsiCo and Whitbread. 1984 Over 50 restaurants so far in the UK. 1986 By now, there were 100 restaurants in the UK and 5000 worldwide. 1987 An average of one restaurant opened each week in the UK. 1988 The UK's First Delivery Unit was opened in Kingsbury, London. 1992 There were 9,000 restaurants in 84 countries. 1993 There were 300 restaurants and delivery stores in the UK. 1994 10,000 Pizza Huts were open for business. 1997 PepsiCo decided to focus on their drinks business. As a result, Tricon Global Restaurants was born, creating the largest restaurant brand in the World. Tricon became the partner company with Whitbread. 1999 Pizza Hut had over 400 restaurants, employing 14000 people. 2002 Tricon Global became YUM! Brands Inc. 2006 Whitbread sold their share of the joint venture to Yum! Brands Inc. Pizza Hut UK Ltd was now 100% owned by Yum! 2008 We bought Godfather's Pizza in Ireland with 28 stores

2.2 MISSION STATEMENT
Pizza Hut's Mission Statement We take pride in making a perfect pizza and providing courteous and helpful service on time all the time. Every customer says, "I'll be back!" We are the employer of choice offering team members opportunities For Growth, Advancement, And Rewarding Careers in a Fun, Safe Working Environment.  P.E.A.R.L.S o PASSION for excellence in Doing everything o EXECUTE with positive energy and urgency. 9|Page

Assignment II – Business Mathematics & Statistics (523) o ACCOUNTABLE for growth in customer satisfaction and profitability. o RECOGNIZE the achievement of others and have fun doing it. o LISTEN and more importantly, respond to the voice of the customer.

2.3 PIZZA HUT FUTURE IN PAKISTAN
Pizza Hut is planning to invest approximately 1 billion rupees (U.S. $17.2 million) to expand into Pakistan. According to the Daily Times, Manzar Riaz, CEO of Pizza Hut operations in the country, told the press on Feb. 7 that the money would be used to open about 20 new outlets and would create some 2,000 new jobs. He said there are immediate plans to open outlets in the cities of Peshawar and Faisalabad, as well as plans to set up kiosks at high-traffic public places such as railway stations.

2.4 PIZZA HUT PRODUCTS
Pizza hut is famous for pizzas, but it offers other food items also. The menu includes:  Starters  Soups & Salads  Pastas  Sandwiches  Pizzas  Desserts  Beverages

2.5 MARGINAL COST ANALYSIS
The range pizza hut offers is quite large, and it was unacceptable for the management to give information about each and every product. Therefore I selected pizzas for the purpose of cost analysis. Profit and Revenue analysis is not available, since the organization does not share their profit/revenue functions.

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Assignment II – Business Mathematics & Statistics (523) The Pizza‟s section is divided into three sub-types, and the marginal cost function for each of the types will be calculated. The sub-types are:  Personal Pan 6” (Serves 1)  Regular Pan 9” (Serves 2)  Large Pan 12” (Serves 3) Fixed cost for making these pizzas is Rs. 29,000. Variable cost varies with the sizes and flavors of the pizzas. But functions are made by ignoring the flavors and taking the average variable cost per size.

2.5.1 COST ANALYSIS OF SMALL PIZZAS
Cost (x) = 300x1/2 + 50x + 29,000 Where 300x1/2 is the cost of material, 50x is the cost of making the pizza, and 29,000 is the fixed cost that includes, bills, salaries, administrative costs etc. The function is valid for up-to 4 pizzas only. Marginal Cost = MC = C‟(x) = 300 * 1/2 * x (1/2-1) + (1) * 50 x (1-1) + 0 MC= C‟(x) = 150 x-1/2 + 50 The cost of small pizza (per unit) is: C‟(1) = 150 * (1)-1/2 + 50 = Rs. 200 The price of small pizza at pizza hut costs around 250rs.This means that if 1 unit is produced than they will go through loss. C‟(2) = 150 * (2)-1/2 + 50 = Rs.156.38 This means the cost is decreased when two pizzas are made. C‟(4) = 150 * (4)-1/2 + 50 = Rs.125 11 | P a g e

Assignment II – Business Mathematics & Statistics (523)

2.5.2 COST ANALYSIS OF REGULAR PIZZAS
Cost (x) = 500x1/2 + 300x + 29,000 Where 500x1/2 is the cost of material, 300x is the cost of making the pizza and other expenses e.g. toppings and stuffed crusts, and 29,000 is the fixed cost that includes, bills, salaries, administrative costs etc. The function is valid for up-to 4 pizzas only. Marginal Cost = MC = C‟(x) = 500 * 1/2 * x (1/2-1) + (1) * 300 x (1-1) + 0 MC= C‟(x) = 250 x-1/2 + 300 The cost of small pizza (per unit) is: C‟(1) = 250 * (1)-1/2 + 300 = Rs. 550 The price of regular pizza at pizza hut costs around 470rs.This means that if 1 unit is produced than they will go through loss. C‟ (2) = 250 * (2)-1/2 + 300 = Rs. 477.30 This means the cost is decreased when two pizzas are made. C‟ (4) = 250 * (4)-1/2 + 300 = Rs.425

2.5.3 COST ANALYSIS OF LARGE PIZZAS
Cost (x) = 800x1/2 + 500x + 29,000 Where 800x1/2 is the cost of material, 500x is the cost of making the pizza and other expenses e.g. toppings and stuffed crusts, and 29,000 is the fixed cost that includes, bills, salaries, administrative costs etc. The function is valid for up-to 4 pizzas only. Marginal Cost = MC = C‟(x) = 800 * 1/2 * x (1/2-1) + (1) * 500 x (1-1) + 0 MC= C‟(x) = 400 x-1/2 + 500 12 | P a g e

Assignment II – Business Mathematics & Statistics (523) The cost of small pizza (per unit) is: C‟(1) = 400 * (1)-1/2 + 500 = Rs. 900 The price of large pizza at pizza hut costs around 790rs.This means that if 1 unit is produced than they will go through loss. C‟ (2) = 400 * (2)-1/2 + 500 = Rs. 783.70 This means the cost is decreased when two pizzas are made. Similarly, C‟ (4) = 400 * (4)-1/2 + 500 = Rs.700

2.6 APPLICATION OF COST FUNCTION
After taking values from the cost functions, the market price is set. Price from cost function plus the profit makes the complete price.

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Assignment II – Business Mathematics & Statistics (523)

DATA COLLECTION METHODS
The information in the assignment is based on true facts. It was taken from reliable sources on the internet and telephonic call with persons at Pizza hut. The cost functions were made on the idea extracted from the data provided. Source of Primary data was, Mr. Amir Zeb shift Manager of Pizza Hut-Peshawar, A few marketing persons of Pizza hut, and lower staff of Pizza hut.

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Assignment II – Business Mathematics & Statistics (523)

SWOT ANALYSIS
4.1 STRENGTHS
 Pizza Hut is the market leader in providing different products of pizzas  Their good image makes the organization more strong.  Pizza Hut is providing good taste, quality products with qualified staff, good atmosphere and hygienic environment.  They are specialized in pizzas.  Motivation level of staff is very high which make the organization more prosperous.  They are ISO (International Standard Organization) certified.  They have enough resources for operating different activities of the organization.  They are providing free home delivery service.  They have created monopoly in this sector.  Another big Strength and even a Competitive Advantage is the fact that they have a full service restaurant as well as delivery services.  Most of Pizza Hut's competitors do not have restaurants. Because of the restaurant, Pizza Hut can market too many different segments that other pizza chains cannot. For example, Pizza Hut can market to families much easier than its competitors

4.2 WEAKNESSES
 Pizza Hut has higher overhead costs, due to the restaurant that other competitors don't have to deal with.  Another result of higher overhead costs is higher prices Pizza Hut must charge. Obviously, Pizza Hut is not the low cost producer. They rely on their quality pizza and good service to account for their higher prices. They are providing less range of products comparatively with high prices. They are more focused on Western taste instead of Eastern.

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Assignment II – Business Mathematics & Statistics (523)

4.3 OPPORTUNITIES
New markets can be explored and new opportunities they can gain.  Pizza Hut can come up with the new products considering the Eastern taste of the people as like McDonalds.  Diversification of new products can increase their market share.  They can reduce their prices because of more resources.

4.4 THREATS
Pizza Hut's number one threats are from their competitors.  Their closest competitor is Domino's Pizza who has recently to open their Branch at Islamabad. Domino's main competitive advantage over Pizza Hut is their Lower price.  Little Caesar's who is establishing their self in India and might move to Pakistan is another one of Pizza Hut's competitors, right behind Domino's in market share. Little Caesar's is famous for offering large quantities of pizza for less money.  New entrance like Dominos pizza in Pakistan market can affect their market share.  Other local restaurants can affect their market share by providing pizzas with lower price.  Social factors can affect their image as a Western organization

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Assignment II – Business Mathematics & Statistics (523)

CONCLUSION
Pizza Hut has many targets which it has achieve in a given period of time. The time-period is mostly a year. Therefore, in order to fulfill the targets different strategies are adopted by Pizza Hut. It can be concluded that these strategies have been successful and there is flexibility in the strategies, as they can be changed with the changes in the market conditions as well as the targets. Moreover, Pizza Hut management has been using the financial information well, and has been taking decisions accordingly.

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Assignment II – Business Mathematics & Statistics (523)

RECOMMENDATIONS
Pizza hut should start other products for the generation of their product, since they do not get enough profit from the pizzas only. The prices of pizza hut are more than that of its competitors and other restaurants in the market. Therefore, pizza hut should start working on this issue, and should decrease its prices.

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Assignment II – Business Mathematics & Statistics (523)

REFERENCES
i

-

http://en.wikipedia.org/wiki/Differential_calculus#Applications_of_derivatives http://www.ses.wsu.edu/people/faculty/rosenman/dist301/Margin.htm http://mathworld.wolfram.com/MarginalAnalysis.html

ii

iii

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