KCE

COLLEGE

QUANTITAVE ANALYSIS
FOUNDATION LEVEL
TIME SERIES
JUNE 2000Q5B
The number of auditing job performed by JM auditing firm in each of the last nine months are
listed below.
Months Jobs
September 353
October 387
November 342
December 374
January 396
February 409
March 399
April 412
May 408
Required:
JM feels that if June auditing jobs will more than 410, they should hire an extra auditor.
Determine whether extra auditors are required using the following methods:
a. 3 weighted moving averages with weights of 0.60, 0.30, and 0.10. (6 marks)
b. Assume linear trend function. (6marks)
c. Exponential smoothing method (α=0.4) (8 marks)

MATRICES
QUESTION 1.
In recent research survey by CIA on the use of the services of auditing firms by various Non-
Governmental Organization in Kenya, the findings were as follows:
Out of those NGO’s which used P&M auditors in 2015 financial year, 10% switched to DT
auditor, 10% switched to Best auditors and 10% switched to Excel auditors.
Out of those who used which used DT auditors in the same financial year, 20% switched to Best
auditors and 10% to Excel auditors. Out of those who used Best auditors, only 10% switched to
Excel auditors. Out of those used Excel auditors, 20% switched to P&M auditors, 10% switched
to DT auditors and 10% Best auditors. It was further found that the market shares of P&M, DT,
Best and Excel auditors was 20%, 30%, 40%, and 10% respectively.
Required:
Determine which auditing firms are likely to audit more and less NGO’S in the year 2016 and
2017.

CPAK JOHNMARK 0705748300 Page 1

QUESTION 2
(a) Define the following terms as used in Markov analysis.
(i) Transition matrices.
(ii) Re-current state
(iii) Steady state
(iv) Closed state
(v) Absorbing state (10 marks)
(b) A, B &C are accounting firms offering auditing and consultancy services in Huruma and
its environs. The management of firm A were concerned of the shrinking market share of
the firm in the region and therefore commissioned a survey to monitor the trend.

The result of the survey was as follows:

Firms clients as at 31/12/ 2014 loss of client to client as at 31/12/ 2015
A B C
A 204 – 15 9 212
B 416 12 – 7 417
C 531 20 5 -- 522
Required:
(i) Formulate the above data into a matrix of transition probabilities(4 marks)
(ii) Estimate the market share for each of the firm for the year ended 31 Dec 2016. (4
marks)
(iii) Determine the steady state of the firm’s market share (4 marks)
(iv) State any 3 assumptions of Markov analysis (3 marks)

QUESTION3.
The switching pattern of brands X, Y and Z is shown below.
Products No of clients Market share X Y Z
31/12/2011 Gains from
X 400 0.2 - 20 11
Y 650 0.325 18 - 9
Z 950 0.475 25 12 -
1. Determine the transition matrix
2. Determine the market share on 31/12/2013.
3. Determine the long run market share
QUESTION 4
Markov (JUNE 2005 Q1B)
The manufacturer of Tamu soft drink has been facing stiff competition on its main brand Tamu
cola soda. The management is considering an extensive advertisement and rebranding campaign.
If the current branding remains, the transition matrix of consumer between Tamu cola and other
brands will be as follows:

CPAK JOHNMARK 0705748300 Page 2

 TO
Tamu-cola Others
Tamu –cola 0.85 0.15
From
Others 0.25 0.75

After advertising and rebranding campaign the transition matrix is expected to change as
follows:
TO
Tamu-cola Others
Tamu –cola 0.90 0.10
From
Others 0.30 0.70
The advertising and rebranding campaign is expected to cost sh.20M each year.
There are 40m consumers of soft drinks in the market and for each consumer the average
profitability is sh.5 annually.
Required:
(a) The equilibrium state proportion of Tamu cola soda before advertising campaign. (5
MARKS)
(b) The equilibrium state proportion of Tamu cola soda after advertising campaign. (5
MARKS)
(c) The expected annual profit increase or decrease after the advertising campaign. (5
marks)
Question 4
The national office of car Rental Company is planning its maintenance for the next year. The
company’s management are interested in determining the company’s needs for certain repair
parts. The company rents saloon car, Subaru, Pickups. The matrix N shown below indicates the
number of each type of vehicle available for renting in the 4 region of the country.

Saloons Subaru pick-up

160 400 500 Coast
N= 150 300 200 Central
100 100 150 Western
120 400 300 Highlands
Four particular parts interested, because of their cost and frequency of replacement is; fan belts,
sparks plug, batteries, and tires. On the basis of studies of maintenance record in different parts
of the country. The management has determined the average number of repairs parts needed per
car during the year.

These are summarized in the matrix R below.

CPAK JOHNMARK 0705748300 Page 3

 Saloons Subaru pick-ups
17 16 15 Fan belts
R= 12 8 5 Plugs
9 7 5 Batteries
4 7 6 Tires

Required:
1. The total demand for each type of car (3 marks)
2. The total number of each repair required for the fleet (3 marks)
3. If the matrix C below contains the cost per unit in shillings for fan belts, Spark plugs,
batteries and tires, calculate the total cost for all the repair parts.
C= (1250, 800, 6500, 8000) (4 marks).
LEONTIFFS
QUESTION 1
A two sector economy has the following input output
P q
Technological matrix, A= from P 0.3 0.2
Q 0.5 0.4
The final demand for the next year is estimated as sh 50 million for sector P and sh 80 million for
sector Q.
Required:
Determine the total production from each sector in order to satisfy the total demand.

QUESTION TWO
An economy consist of three independent sectors; Agriculture, mining and manufacturing. The
following flow of input-output has been presented below:
inputs
agriculture mining manufacturing Final demand
OUTPUT Agriculture 20,000 32,500 37,500, 10,000
Mining 30,000 65,000 37,500 30,000
manufacturing 40,000 32,500 12,500 40,000
Required:
I. The technical coefficient matrix
II. The Leontiff’s inverse matrix
III. The total output level for each sector if the final demand for agriculture sector increases
by 1000 and that of manufacturing sector decreases by 500 tonnes and the final demand
for the mining sector remains unchanged.

PROPBABILITY THEORY.
Addition rule.
1. Given the probability that A wins=1/4, B wins =1/5, C wins=1/6, D wins=1/7, what is the
probability that only one will win?

CPAK JOHNMARK 0705748300 Page 4

 2. Suppose 80% of all tourists who come to Kenya will visit Nairobi, 70% will visit Kisumu
and 60% both cities. What is the probability that a tourist will visit Nairobi or Kisumu?
MULTIPLICATIVE RULE.
1. A can hit a target 4 times in 5 trials, B 3 times in 4 trials, and C 2 times in 3 trials.
Calculate the probability that:
 All will hit
 Only B & C hit
 Only A & C hit.
BAYESIAN RULE.
1. Consider three identical bags A, B& C. Bag A contains 2 gold coins, bag B contains 2
silver coins and bag C contains 1 silver and 1 gold. What is the probability of selecting
bag A out of the 3 bags? And also the probability of selecting a gold coin from bag A?
2. When a machine is set correctly, it produced 25% defectives otherwise it produces 60%
defectives. The chance that the machine is set correctly is 50% .The machine was set and
before commencement of production, one piece was inspected and found to be defective
.What is the probability that the machine was set up correctly?
PROBABILITY TREE.
The probability of the company obtaining contract A is 0.3, contract B 0.4 contract C 0.6.If the
company obtains none or only one of these contracts it will bid for D with 0.8 probability of
obtaining it. What is the probability that the company will obtain:
a) Just A and B
b) At least A and B
c) Will obtain C and D
d) Will obtain Just C
e) Will obtain Just D

POISSON PROBABILITY
During a normal day, an average number of Lorries arriving to unload at a depot is 3 per hour.
What is the probability that in any hour, more than 4 Lorries will arrive?

EXPONENTIAL DISTRIBUTION.
The time taken by a cashier in a certain bank to serve customers is believed to follow an
exponential distribution with a mean of 15 minutes. Determine the probability that a customer
will be served for a period of:
a) Of at most 10 minutes?
b) Between 12 and 20 minutes?
c) More than 8 minutes?

CPAK JOHNMARK 0705748300 Page 5

NORMAL DISTRIBUTION.
QUESTION ONE
Suppose a normally distributed random variable X has a mean of χ=30 and a standard deviation
σ=7; find the probability
(a) X>23
(b) X<20
(c) X>34
(d) X is between 35 and 45.
QUESTION TWO
An average daily temperature in Johannesburg during summer follows normal distribution with a
mean of 27 degrees Celsius and a standard deviation of 15 degrees. What’s the probability that
a randomly chosen sample of 10 summer days will have an average temperature of less than 24
degrees?
BINOMIAL DISTRIBUTION.
QUESTION ONE
Super cut, a beauty salon in Subukia, offers a full refund to any customer who is not satisfied
with the way his/her hair looks after it has been cut or styled. The owner believes the hair style
satisfaction from the customer is independent and that the probability a customer will ask for a
refund is 0.20. If the conditions of binomial distributions hold:
a) Find the probability of less than 3 refund requests from 8 randomly selected customers.
b) Find the probability that more than 3 customer will request for the refund.
QUESTION TWO.
A new cars salesperson knows that he sells cars to one in very twenty customers who enters the
showroom. What’s the probability that he will sell a new car to exactly two of the next three
customers?

SETS THEORY
Question 1(June 2005 Q2A)
A market survey investigating consumer’s preference for the three brands of beverages namely:
Coffee, Tea and cocoa in Subukia town gathered the following information.

From a sample of 800 consumers, 230 took coffee, 245 took tea and 325 took cocoa, 30 took all
the three beverages, 70 took coffee and cocoa, 185 took cocoa only and 110 took coffee only.
Required:
(i) Present the above information in a Venn diagram (4 MARKS)
(ii) The number of consumer who took tea only (2 marks)
(iii) The number of customers who took coffee and tea (2 marks)
(iv) The number customers who took tea and cocoa only (2 marks)
(v) The number of customers who took none of the beverages (2 marks)

CPAK JOHNMARK 0705748300 Page 6

Question 2 (DEC 2003Q2)
a. Explain the purpose of a Venn diagram (6 marks)
b. A market study taken at a local sporting store, Maua store showed that of the 200 people
interviewed, 60 owned tents, 100 owned sleeping bags, 80 owned camping stove, 40
owned both tent and stoves and 40 owned both sleeping bags and stoves.
Required:
If 20 peoples interviewed owned tent, a sleeping bag and stoves, determine how many people
owned only camping stove. (10 marks)
QUESTION ONE: (10 MARKS)
a) If R = (w, x, y), T = (u, v, w, x), S= (u, v, w) and the universal set, U = (u, v, w, x, y, z).
Find the elements in the following sets:

i. R’ ii) (R-S) iii) (T-R) S

iv. (R’

DECISION MAKING.
QUESTION ONE (SINGLE DECISION).
Samoa ltd has to decide which of the three mutually exclusive products: X, Y & Z to launch. The
company’s directors believe that the demand for the three products will valley depending on
competitor’s reaction. There is a 30% chance that the competitor’s reaction will be strong, a 20%
that the reaction will be normal, and 50% chance that the reaction will be weak. The company
uses expected value to make this type decision.

The net present values of the possible outcomes are as follows:

Product X Product Y Product Z

Competitors reaction sh “000” sh “000” sh “000”
Strong 400 900 1,200
Normal 600 1,200 800
Weak 1,000 1,600 1,000
A market researcher believes that he could provide perfect information for the above market.
Required: Using the following decision criterion, find the best option.
(a) Minimax criterion (2 marks).
(b) Maximin criterion (2 marks).
(c) Laplace rule/Equal probabilities criterion. (2 marks).
(d) Hurwicz/Coefficient of optimism using α=0.6 (3 marks)
(e) Savage regret/minimax regret (3 marks)
(f) Expected monetary value (3 marks)
(g) Value of information (3marks)
(h) Expected opportunity loss (4 marks)

CPAK JOHNMARK 0705748300 Page 7

Multiple decision
QUESTION ONE.
Bipo ltd is planning to launch a new product into the market. In order to determine the
introduction selling price of the product, a research was undertaken. The following information
has been obtained from the research under two possible selling prices; Sh.300 and Sh.350 per
unit.

Selling price per unit Sh.300 Selling price per unit Sh.350
Probability Sales volume (units) Probability Sales volume (units)
0.4 120,000 0.3 108,000
0.5 110,000 0.3 100,000
0.1 140,000 0.4 94,000
Additional information.
1. The variable production cost would be sh.120 per unit for the production volumes up to
and including 100,000 units each year. However, if production exceeds 100,000 units
each year, the variable production cost per unit would fall to sh.110 for all units
produced.
2. Advertising cost would be sh.9, 000,000 per annum at a selling price of sh.300 and
sh.9,700,000 per annum at a selling price of 350.
3. Fixed production cost would be sh.4, 500,000 per annum.
Required:
Advise the management of BIPO ltd on the optimal selling price per unit for the new product
using decision tree. (15 marks)

QUESTION 2
Collins simiyu recently acquired a piece of land in Kamulu. A property development company
has offered him sh.300, 000 for the piece of the land. He has to make a decision on whether to
cultivate the land or sell it the property development company. If he decides to cultivate the land,
there is probability of getting a high, medium or low harvest. The expected net income for each
of the above states of harvest are shown below:

State of harvest Net income (sh.)

High 500,000
Medium 100,000
Low (20,000)

From the past experience, there is a 10% probability that the harvest will be low, 30% probability
that the harvest will be medium and a 60% that the harvest will be high.

CPAK JOHNMARK 0705748300 Page 8

Collins simiyu can engage an agricultural expert to carry out the survey on the productivity of
the land which will cost him 30,000. The expert gives the following information as to the
reliability of such surveys which can be either accurate or not accurate with equal probabilities.

Results of the survey State of the harvest

High Medium Low
Accurate 0.70 0.20 0.10
Not-accurate 0.50 0.20 0.30
Required:
(i) Construct a decision tree for the above problem (8 marks)
(ii) The expected monetary value for each decision. (10 marks)
(iii) The decision you would recommend (2 marks)

LINEAR PROGRAMMING.
QUESTION 1(JUNE 2008 Q6)
Quick ltd manufactures two products; X and Y using two machines: B1 & B2. For each machine
there is a maximum of 200 machine hours available each week and a maximum of 400 labour
hours are dedicated to the production of products X & Y each week.
The resources usage per unit of each product is shown in the table below:
Resources Resource usage per unit
Product X Product Y
Machine B1 (hours) 2 3
Machine B2 (hours) 4 2
Labour hours 5 3

Contribution per unit (sh) 3000 2000

Required;
a) Formulate the linear programming model to solve the above problem (5 marks)
b) Graphically solve the linear programming model formulated in (i) above. (5 marks)
c) Compute the shadow price of each constrains. (6 marks)
d) Interpret the meaning of the shadow price obtained in (iii) above. (2 marks)

CPAK JOHNMARK 0705748300 Page 9

 SAMPLING AND HYPOTHESIS TESTING.
Hypothesis testing-is the process of confirming whether the pre-existing opinion is true or false
about the population parameters.
Significance level-is the probability of rejecting a true hypothesis.

TYPES OF HYPOTHESIS.

1. Null hypothesis (Ho)-this is formed by casting doubt about the existing claim.it starts
from a negative point and the objective is to trigger more information. It states that there
is no significant relationship between variables.
2. Alternate hypothesis (Ha)-this is formulated to be in agreement with the current claim.it
is the one accepted when null is rejected

Types of hypothesis errors.

 Type I error-is an error made when we reject the null hypothesis when it’s true.
 Type II error-is an error made when we accept the null hypothesis when the claim is
false.
Steps in hypothesis testing.
1. State the null hypothesis (Ho)
2. Decide on the alternate hypothesis (Ha)
3. Choose the significance level- is the probability of rejecting a true hypothesis.
4. Calculate the standardized Z statistics.
5. Formulate decision rule-this can be one or two tails depending on how the alternate
hypothesis have been formulated as shown below.

 Two tail test: ha {≠}it’s a test in which the alternates hypothesis is either less than
or greater than
 One tail test: ha {˂ or ˃}It is a test in which the alternate hypothesis ie either less
than or greater than.
6. Accept or reject the null hypothesis.
SAMPLING SUMMARY.

SAMPLING-is the procedure of selecting a sample.

SAMPLE-is a small group of items selected from the population to act as a representative of the
population.
SAMPLING DISTRIBUTION-is the arrangement of sample statistics with representative
frequencies
Types of distributions.
1. Z-distribution
This is used where the sample has been randomly selected and for samples with items
greater than 30.
2. T-distribution-mostly used when the sample size is less than 30 items.
3. Chi-square-this is used to compare attributes. is a test which indicates the magnitude of
difference between observed frequencies expected under certain assumptions.

CPAK JOHNMARK 0705748300 Page 10

CONFIDENCE INTERVAL (May 2018 Q1c)
Illustration 1
A sample of 100 florescence tubes from XYZ ltd Company gives a mean length of 20.5 hours
with a standard deviation of 1.6 hr.
Required.
Find a 95% confidence interval and interpret the results.

CONFIDENCE INTERVAL ABOUT PROPORTIONS.

QUESTION 2
In a sample of 200 voters, 80 were in favor of re-introducing death penalty.
a. Find the 95% confidence interval for the proportion of all voters who are in favour of this
opinion.
b. The 99% Confidence interval
QUESTION 3
The standard deviation of weights of student in KCE College is known to be 1.5 kgs. Determine
the size of a sample necessary to estimate the mean weight of the student if the estimate is to be
accurate within 0.75 kg with 99% confidence.

HYPOTHESIS TEST FOR ONE MEAN

QUESTION 1

A sample of 100 florescence light tubes has a mean life of 20.5hours and a standard deviation of
1.6hours.Test:
a) At 1% level of significance whether the sample comes from the population with the mean
life length of 23.2 hours.
b) At 5% level of significance whether the sample comes from a population with the mean
life length less than 20.8 hours.
c) At 1% level of significance when the mean life length is greater than 23.2 hours.

TEST ABOUT TWO MEANS (May 2018 Q3B) (DEC 2017 Q2B)
QUESTION 1
2 factories are producing visual display units for computers. Use the following sample data to
test whether the two production lines of producing units with the same mean life length.

Ẍ σ n
Sample 1 20.5 3.4 125
Sample 2 19 2.1 180

QUESTION 2
A farmer was interested in a particular fertilizer yield. He planted certain bleed of maize on 60
equal pieces of land and allowed the maize to grow under natural circumstances and conditions
without applying fertilizer. In this experiment the mean harvest was 60 bags with a standard
deviation of 1.3 bags. The same farmer carried out a second experiment, where he picked 50

CPAK JOHNMARK 0705748300 Page 11

equal plots in the same area and planted the same bleed of maize with the application of
fertilizer. After the harvest, it was established that the mean harvest was 63 bags per plot with a
standard deviation of 1.5 kgs.
Required:
Conduct a statistical test, at 1% level of significance to test whether there was a significance
increase in the mean harvest under the 2nd condition.

TEST ABOUT SMALL SAMPLE. (May 2017 Q3a)

For small sample we use t-test.

Question 1
Suppose a supplier claims that his product has a content of the main ingredient of 40g.we
measure the content in a sample of 5 items of the product (choose at random) and we obtain the
following value in grams:
38, 32, 44, 37 and 34
Does the sample invalidate the supplier claim?

Question 2 (NOV 2018 Q1)

Consider the following data.
Group 1 score 45, 87, 64, 92 38
Group 2 score 40, 35, 61, 50, 47, and 32
Is there a significance difference in mean score between two groups?

HYPOTHESIS TEST FOR 2 PROPORTIONS (May 2019 Q3b(ii)

P= p1n1 + p2n2
n1+n2
.q= 1-p

Z calc= P1-P2
√pq/n1 + pq/n2

CHISQUERE
Grouped data
QUESTION 1
Auto-spare ltd is a large insurance company specializing in car insurance. It has been always
been company’s policy to charge different premiums according to the size of the car. One of the
company’ analyst has examined data from 566 claims. Data collected is shown below.

Types of claim size of car insured

Small medium large
Personal injury 120 157 42
No injuries 149 105 93

Do these data indicate that the frequency of personal injury claims is associated with the size of
the car insured? Use chi-square.

CPAK JOHNMARK 0705748300 Page 12

Question 2
Ungrouped data
The numbers of automobile accidents per week in a certain community were as follows.
12 8 20 2 14 10 15 6 9 4
Are these frequencies in agreement with the belief that accidents condition were the same during
this 10 weeks period.(chi-square and 5%)

AN0VA ANALYSIS
QUESTION 1 (JUNE 2008 Q4B).
A study was conducted to predict the ability of economist and financial specialist on the future
performance of their country’s economy. Below is part of computer output result produced using
statistical software.

Parameter estimates.
Variables Coefficient Standard error t-ratio
Constant 0.983 A 0.34
X1 B 0.257 2.42
X2 0.587 0.225 2.61

Analysis of variance (ANOVA)

Source Degrees of freedom Sum of squares Mean of square F-value
Regression 2 2904.8 D E
Error (residual) 11 100.1 9.1
Total 13 C
Required:
(i) Compute the values of A, B, C, D and E. (5 marks)
(ii) The estimated regression model. (2 marks)
(iii) Explain the coefficient of parameter estimates (6 marks)
(iv) The explanatory power of the model. (3 marks)
(v) Test the statistical of each of the predictor variables; X1 and X2(use a significant
level of 5%) (3 marks)
(vi) Comment on the statistical significant of the model at 5% significant level given that
the F-tables values 3.98. (2 marks)

CPAK JOHNMARK 0705748300 Page 13

HIGH LOW METHOD
QUESTION 1
The following information was obtained from the records of X ltd a manufacturing
company.
Number of units Production cost
10 200
30 500
18 300
40 600
19 320
Required:
Use the above information to develop an equation using high low method

Multiple regression
Question 1
Formulate a multiple regression equation using the following data.
X1 X2 Y
2 5 20
4 7 24
6 10 25
8 12 29
10 15 30

TIME SERIES
Components of time series.
1. Secular trend (T)-This refers to a consistence change in a set of data.
2. Seasonal Variation (S)-These are short term changes that tend to repeat at least once per
year.
3. Cyclical Variation-These are long-term changes that tend to repeat at least 14 years.
4. Residual/Random/Erratic (E)-These are irregular and unpredictable changes in a set of
data
Purpose of seasonal index/deseasonalize data.
1. Used to evaluate seasonal effect on a time series.
2. Used to adjust trend forecast.
3. Used to summarize data.

CPAK JOHNMARK 0705748300 Page 14

 CALCULUS AND FUNCTIONS.
CALCULUS is a mathematical study of continuous changes which is divided into 2 major areas:
 Differentiation
 Integration.
Calculus is applied in relation to functions. A function is a mathematical expression of the
relationship existing between 2 variables which are independent (X) and dependent variable(Y).
Classifications of functions.
1. Uni-variate function.
This is a function with only one independent variable i.e. y=a+bx
2. Bi-variate function.
Is a function with only 2 independent variables i.e. y=a +b1x1+b2 x2.
3. Multi-variate function.
Is a function with more than 2 independent variable. I.e. y=a +b1x1+b2 x2. +……+bnxn

Other types of functions.

1. Logarithmic functions- A function is said to be logarithmic if one of its element has a
logarithm e.g. y=2 log X.
2. Exponential function-is a function whereby the independent variable is part of the
power.it has the following general format.
Y=aebx
3. Polynomial functions-a function is said to be polynomial if it can be subjected to
differentiation or integration.
4. Quadratic function
√

Applications of functions in business.

 Computation of wages.
 Computation of depreciation and appreciation.
 CVP analysis.
 Demand and supply analysis (Equilibrium points).
 Price setting

Differentiation
This is the method used to compute the rate of change/gradient where the 2 variables are
connected to each other using a non-linear function. When the function is differentiated it is
known as derivative.

Integration
This means to combine or to sum up.

Assumptions of markov analysis.

 The states are finite and constant.
 There are no absorbing states.
 The probabilities are empirical and constant.

CPAK JOHNMARK 0705748300 Page 15

  The transition matrix is used to predict the period equivalent to one over which it was
developed.
 Transition matrix has no memory i.e. the future state is only affected by the immediate
current state.
Application of markov analysis.
 In education institutions to analysis transition rates of students.
 HR management to study the labour turnover.
 Financial accounting to study doubtful and bad debts.
 Financial markets to forecast prices of assets.
 Marketing and advertising to study behavior of the customers.

LINEAR PROGRAMMING.

This is a mathematical technique used to determine how well scarce resources can be utilized in
order to generate maximum possible returns.

Methods of linear programming

1. Graphical method-This method is applied when there are only two products under
consideration.
2. Simplex method-this is used to solve linear programme with 2 or more products

APPLICATIONS OF LINEAR PROGRAMMING.

 Product mix decision.

 Game theories.
 Network analysis.
 Capital budgeting.
 Inventory controls.
 CVP analysis.
Assumptions of linear programming/limitations /characteristics.

 Linearity-this rules that there is no economies of scale and diseconomies of scale.

 Proportionality-the quantity of resources used are directly proportional to the units
produced.
 Divisibility-the quantity of a resource can be sub-divided into smaller proportion.
 Additivity-the various proportions of a resource used by different product can be added
together
 Certainty.
 Non negativity-all the values in the programme are at least equal to zero.
 Finiteness.-all the items involved in the programme are well known and countable.

CPAK JOHNMARK 0705748300 Page 16

Steps followed in linear programming.
1. Determine the objective-this can either be maximization or minimization. The following
equalities are used:
Maximization problem {≤)
Minimization problem {≥}
2. Determine the decision variable
3. Determine the limiting factor/constrain/scarce resources.
4. Non-negativity
Terminologies.
1. Optimal solution
This is the combination of the 2 products which will result to the maximum
contribution.it is the coordinates of the corner of the feasible region which is furthest
from the origin.
2. Feasible region.
This is a region containing all the possible solutions of the problem.
3. Binding resources.
A binding resource is the one that is fully utilized at optimality and which forms the
optimal corner/point.
4. Non-binding resources.
These are resources which are not fully utilized at optimality.
5. Slack
This refers to the unused quantity at optimality. They are founded where the inequalities
are ≤.
For binding resources are always zero.
Importance of slack.
 They serves as a basis of computing the resource prices.
 If they appear in the solution, it means there is some unutilized capacity.
 If they do not appear, this means there is fully utilization.
6. Surplus.
This is the quantity of a resource which is used in excess of what was initially available.
7. Shadow/oval price.
This can be defined as follows:
 The maximum price that can be paid in order to acquire an extra unit of resource.
 The maximum profit that can be earned for acquiring an extra unit.
 Maximum loss that cab be suffered for not acquiring an extra unit of resources.

Applications of shadow price.

 Determination of limiting factor.
 Sensitivity analysis.
 They serve as a basis of computing the resource price.

8. Multi optimality
This is where a linear programme has more than one different combination of the product
with the same profit.
9. Infeasibility

CPAK JOHNMARK 0705748300 Page 17

 This means lack of feasible region.it is brought about by presence of mixed constraints. A
linear programming solution is said to be infeasible if there is no solution that satisfies all
the constraints simultaneously.
10. Unboundedness.
A linear programming solution is said to be unbounded if it can be improved without
limit. This is where the feasible region is not bounded from above.it occurs where the
objective is to maximize but the constraints are in plenty.
11. Degeneracy
This refers to the disappearance of one of the items from the original programme at the
course of solving the programme.
12. Reduced value.
This is the amount by which profit will increase if an extra unit is produced. For basic
product reduced value is always 0.

 Value-units produced.
 Objective coefficient-profit/contribution
 Right hand side ranges-constrains/limiting factor.

Characteristic of exponential smoothing

1. Greater weights are assigned to more recent data.
2. It incorporates all past data.
3. It adapts continually as new data becomes available.
4. Changes to the model can be made to suit changing conditions by altering α value.
5. The model can be weighted to cope with problems of long-term trend, seasonal variation
and cyclical variation.
6. It is applicable in both discrete and common data.

The most commonly used matrices in the business application are:

1. Single tone/scalar matrix
This is a matrix which has only one element e.g. A= {4}
2. Column vector matrix
Is a matrix which has only one column but more than one row.
3. Row vector matrix
Is a matrix with one row but more than one column.
4. Zero matrix.
This is a matrix which has no element e.g. A= ( )
5. Diagonal matrix
Is a matrix whereby the elements below, the diagonal are shown without the ones above
the diagonal being shown and vice versa.
6. Square matrix
This is a matrix with equal numbers of rows and columns.

CPAK JOHNMARK 0705748300 Page 18

 7. Identity matrix
Is a matrix whose major diagonal elements are ones and all other elements are zeros.
8. Transposed matrix
Is a matrix whose row and column have been interchanged.
Types of sets.
1. Empty set-is set with no member or element.eg ( person aged above 150 years)
2. Single tone set-set with only one element e.g. ( name of a nation)
3. Equal set-these are sets which has the same number of elements e.g.
A= {a b c}
B= {1 2 3}
4. Dis-joint set-these are sets which do not have a common element e.g.
A = {e f g h I}
B = {1 2 3 4}
5. Universal set (U)
Is a set containing all elements which are if interest to the researcher.
6. Sub-set (c)
A set is said to be a subset of another set if all its members are also members of the
other set. E.g.
A = {1 2 3 4 5}
B = {2 3 4}
7. Complement set
A set is said to be complement to another set if the two sets do not have a common
member but all the members of the 2 sets are the members of a universal set e.g.

INPUT-OUTPUT/LEONTIFF’S ANALYSIS.
This is a technique used to study the interdependence existing between various sectors in the
economy. The interdependence is a term of how the output of one sector becomes input to the
other sector in the economy.
Terminologies
1. Intermediate demand-this is the output of a sector used as an input in another sector to
facilitate further production.it technologic matric is known as technical coefficients.
2. Final demand-this is the output of a sector which is used by the final customer.
3. Primary output-this is output obtained from outside sector (non-producing sector).
4. Secondary output-is an output obtained from internal sector.
5. Total output-this is the sum of the intermediate demand and the final demand.
6. Close input-output model-this is a model which the entire production is consumed by
only productive industries/sectors in the economy.
7. Technical coefficients-are the proportions of input required by an industry/sector in
order to produce unit
8. Technical coefficient matrix-this is a matrix that contains all the technical coefficient.

CPAK JOHNMARK 0705748300 Page 19

Assumptions.
1. All the output and input to a sector can be expressed in terms of money.
2. All the output is used.
3. The number of sector is finite and constant.
4. The law of diminishing returns is absent.
5. Technological matrix does not change.
Importance’s of leotiffs analysis.
1. Helps to determine the output level of each industry in-order to satisfy both intermediate
and final demand.
2. Reveals how various resources in the economy will be shared among the contributing
sectors.
3. Useful in regional and national planning for economic development.
4. Helps in revealing the effect on the economy if some decisions are made bt the
contributing sectors.
5. It is used in computing the gross national product.
6. It is used by firms to apportion common services.

Derivatives.
X-total output
A=technological coefficient matrix.
D=final demand
Total output=intermediate demand + final demand
X= (1-A) -1 D
(1-A)=Leontiff matrix.
(1-A)-1=leotiffs inverse matrix
PROBABILITIES.
This is the measure of chances of likelihood that an event will take place or will not take place. It
is applied under environment of uncertainties i.e. where the outcomes are not known in advance
with surelity.
Probability= desired outcome
All possible outcomes
Terminologies commonly used in probability theory.
 Sample space-this is a group of all events relating to a given experiment.

CPAK JOHNMARK 0705748300 Page 20

  Mutually exclusive events-they are activities whereby the happening of one prevents
happening of the other one. They are described by the word OR and they are handled
using addition rule of probability.
 Independent events-they are events which can happen together. They are described by
the word AND. They are handled using multiplicative rule of probability.
 Dependent/conditional events-the evens are said to be conditional if the happening of
one depends on the happening of another.
 Marginal probabilities-this is the probability of an event whose happening is not
influenced by any other event.
 Joint probability-this refers to the product of several probabilities.
Types of probabilities.
1. Subjective/axiomatic/theoretical probabilities.
These are probabilities obtained without actual experiment. They are founded on theories,
opinion and feelings.
2. Objective /empirical probabilities.
They are probabilities based on the results of the actual experiment.
Assumptions/characteristics of normal distributions.
1. Mode=mean=median.
2. It is a continuous distribution.
3. Height of the normal curve is maximum at the mean.
4. Normal curve is symmetrical
Assumptions/characteristics of binomial distributions.
1. There are only 2 possible outcomes.
2. Probability of success and failure remain unchanged.
3. The trials are independent of each other.
4. The desired outcome is known as success and the other outcome failure

Difference between Poisson distribution and normal distribution.

A Poisson probability distribution describes rare occurrences in space and time while normal
probability distribution is used to describe many and diverse phenomenon in nature.
Factors to determine the size of Pearson’s product moment correlation coefficient.
1. Size of the sample.
2. How the sample was gathered ie randomness.
3. Variability of the data.
4. Amount of error.
5. Presence or absence of linearity.
Advantages of decision tree.
1. Does not require scaling of data.
2. Facilitates sequential decision making.
3. They are easy to use and quick to draw comparisons.

CPAK JOHNMARK 0705748300 Page 21

 4. Allows incorporation of monetary value to decision tree which helps to identify and isolate best
option.
Disadvantages.
1. As the amount of data increases, the construction can be complex.
2. Its time consuming.
3. Require extensive knowledge in decision theory

CORRELATION AND REGRESSION ANALYSIS

Forecasting refers to determining in advance the future outcome.it has the following steps.
1. Identify the dependent variable/value to be predicted (Y).
2. Identify the independent variable/cost driver (X).
3. Gather data relating to X & Y.
4. plot the data and observe the pattern portrayed
5. Formulate an appropriate equation using the following forecasting methods.
 Industrial engineering
 Account analysis
 Learning curve
 Time series
 High-low method.
 Scattered diagram
 Markov analysis
 Simple regression analysis
 Multiple regression analysis

Simple regression/least ordinary square method.

This is a statistical method used to study the relationship existing between variables.it is used
where there exist only one independent variable.it expressed as follows:
Y=a + bx
The strength and the nature of the relationship is usually determined using the following
methods:
a) Correlation coefficient/product moment correlation.
b) Coefficient of determination/explanatory power.
c) Spearman’s rank correlation coefficient.
Correlation coefficient(r)-is used to determine the nature and the strength existing between the
variables.
It is expressed as follows:
r = nƩxy-ƩxƩy
nƩx2-(Ʃx)2 × nƩy2-(Ʃy)2

CPAK JOHNMARK 0705748300 Page 22

Coefficient of determination/explanatory power (r2)-this is used to determine how dependent
variable is explained by independent variable.
r2 = explained variation
Total variation
Spearman’s rank correlation
Sr=1- 6ƩD2
n (n2-1) where D =difference in ranks
Multiple regression method.
Is a statistical method used to study the nature and the strength of the relationship existing
between variable.it is called multiple since it is applied where more than one independent
variable exist. The general is:
The general format is:
Y=B1X1+B2X2+…………..+BnXn
When the data is bivariate the general format is:
Y=a+b1X1+b2X2
Whose normal equation is:
Ʃy= na+b1Ʃx1+b2Ʃx2
Ʃx1 y= aƩx1+b1Ʃx12+b2Ʃx1x2
Ʃx2 y= aƩx2+b1Ʃx1x2+b2Ʃx22
Assumption of regression.
1. Linearity
This holds that the relationship between X & Y is linear i.e. they can be expressed in term
of y=a+bx and when plotted they will portray a straight line.
2. Independence of dependent variable Y assumption.
This holds that the values of Y do not influence each other. If this is the case, the data is
known as CROSS SECTIONAL. If the values are influencing each other, the data is
known as LONGITUDINAL while the condition is known as auto correlation/serial
relationship.
3. Independence of independent variable X.
These is applied where there are more than one independent variable. It requires that the
various independent variance in a model does not influence each other as they predict Y.
4. Zero mean
This means that the variance of the model should be equal to zero.
5. Constant variance/homoscedasticity

CPAK JOHNMARK 0705748300 Page 23

 Homoscedasticity is where the magnitude or the error term is not influenced by the values
of X, if this is the case, there will be a constant variance of one.Heteroskedasticity is said
to be present if the size of the error term appears to be influenced by the values of X.
6. Normality.
This holds that the error term follows a normal distribution with a mean of zero and a
variance of one.
Limitation of regression method.
(a) A sufficient number of observations is required to derive an acceptable cost function.
(b) The assumption of linearity may be misleading.
(c) The cost function is valid only within the relevant range.
(d) The observed data may be affected by inflation or accounting policies and thus affecting
the cost function.
(e) The cost and the activity level sometimes o not relate to the same period.
Applications of regression analysis.
1. Estimating the CAPM characteristic line.
R1=RF + (ERM-Rf) b + Ʃ1
2. Forecasting-regression analysis is a good method of forecasting or predicting
interactions between variables using historical data.
3. Evaluating the strength of the predictor.
4. Used in trend forecasting.
NB: Jensen’s alpha is the same as coefficient (a)
Slope or (b) is the same as beta

TESTING RELIABILITY OF THE EQUATION.

These are procedure or test undertaken to access the accuracy of the equation before it is adapted
as general forecasting tool. The test focuses on 3 main areas:
a) Economic plausibility.
b) Goodness of fit
c) Assumptions
(a) Economic plausibility
This is about testing whether the perceived relationship is logically defensible and economically
sensible. If the relationship is logically defensible and makes economic sense, it is said to be
economically plausible.
If the relationship is not logically sensible, defensible or does not make economic sense. It is
referred to as SPURIOUS/NON-SENSECAL.
(b) Goodness of fit
These are tests conducted to establish how well the equation fit the data from which it was
formulated. It can be done using:

CPAK JOHNMARK 0705748300 Page 24

 a) Coefficient of determination (r2)
b) Standard error of estimates (se).
c) F distribution test.
d) Correlation coefficient (r)
e) Standard error of slope (sb)
f) Z or T distribution test
ILLUSTARATION 1 ( Assignment Dec 2013 Q2b)
Consider the following data below which was obtained from COVID ltd.
Hours (x) Overhead cost (y)
4 200
6 300
8 600
10 800
Required:
a) Coefficient of determination (r2)
b) Standard error of estimate (se)
c) F distribution test
d) Coefficient correlation (r)
e) Standard error of the slope (sb)
f) Z or T test.
SOLUTION.
Hrs (x) Cost (y) (x-ẍ)2 (y-ӯ)2 yn y-yn (yn-ӯ)2 (y-yn)2
4 200 9 75625 160 40 99225 1600
6 300 1 30625 370 -70 11025 4900
8 600 1 15625 580 20 11025 400
10 800 9 105625 790 10 99225 1000
Ʃ=28 1,900 20 227,500 1,900 0 220,500 7,000

ẍ=7 a= -260
ӯ=475 b= 105
Yn=a + bx
Yn= -260+105x
Ʃ (yn-ӯ)2 explained variation
Ʃ (y- yn)2 unexplained variation
Ʃ (y-ӯ)2 Total variations

(a) coefficient of determination.

This shows the changes in Y that are caused or explained by changes in X. The higher the values
of r2, the better the relationship.
r2 = explained variation×100%
Total variation

CPAK JOHNMARK 0705748300 Page 25

 = Ʃ (yn-ӯ)2 220,500×100% =97%
2
Ʃ (y-ӯ) 227,500
Interpretation: This indicates that 97% of the changes in costs are caused by changes in number
of hours.
(b) Standard error of estimate (se).
This shows the magnitude of the error term contained in the forecast value forecasted using the
equation. The smaller the error, the better the equation. The error can be reduced by increasing
the sample size. It is computed as follows:

Se= unexplained deviation Ʃ (y-ӯ)2 7000 =59

Degree of freedom (df) n-k 4-2

Where k is the computed parameter eg y=a+bx k=2 ie a & b

Y=a+bixi+b2x2 k=3 ie a, b1 & b2

The value of Se can used to establish estimated interval as follows:

CI= yn ± t (1-α/2) (n-k) Se

Assume a 95% confidence interval and x=15.
Yn=a+bx = -260+105×15=1315
CI= 1315 ± t (1-0.05/2) (4-2) ×59=
1315 ˂yn˂1569
(c) F distribution test.
This is used to test the significance of the relationship existing between X and Y. The following
steps are followed:
1. Hypothesis:
Ho: The relationship between X and Y is insignificant.
Ha: The relationship between X and Y is significant.
2. Significance level: α=5%=0.05
3. Test statistic:
F= explained variation r2 ÷ (k-1) 0.97÷ (2-1) =65
Unexplained variation (1-r2) ÷ (n-k) (1-0.97) ÷ (4-2)
4. Decision rule: one tail test (greater than) using F table : n-k =2
K-1=1
F critical=18.51
Conclusion: Reject the null hypothesis since F critical is less than F cal i.e the relationship
between X and Y is significant.

CPAK JOHNMARK 0705748300 Page 26

(d) Coefficient correlation (r)-this shows the nature and the strength of the relationship.
It is subject to hypothesis as follows:
Hypothesis Ho: computed r is actually zero.
Ha: computed r is actually zero.
Significance level α=0.05
Statistical test
T= r2 (n-1)
1-r2
T critical=α/2 (n-1)
(e) Standard error of slope (sb)
This shows the extent of the error contained in the value of the slope. It shows how good the
slope is as a measure of the change in Y when X changes by one unit. The lower the error the
better the equation. It is computed as follows:
Sb = se 59 =13.19
√Ʃ(x-ẍ) 2 √20
The value of Sb is used to establish the confidence interval for the slope using the formula
below:
CI = b ± t (1-α/2)(n-1) Sb
A 99% confidence interval for the above slope will be computed as follows:
b=105
CI = 105 ± t (1-0.01/2)(4-1)13.1
CI=105 ± 5.841×13.19
CI= (28, 182)
(f) Z or T test.
This is used to establish the significance of X as predictor of Y.
Z is used where population is known and sample is atleast 30 units. T is used for unknown
population and sample is less than 30.
The higher the value of t cal, the better the equation. A test for the significance is done as follows
Hypothesis: Ho: X is not a significant determinant of Y.
Ha: X is a significant determinant of Y.
Significance level = 5% = 0.05
Decision rule = two tail test.
t=b/sb

CPAK JOHNMARK 0705748300 Page 27

 ANALYSIS OF VARIANCE (ANOVA)
This is a computerized aided analysis of regression analysis. Interpretation is done as follows:
SUM OF SQUERE (SS) =variance= variations
 Regression sum of square (Reg SS) = Explained variation.
 Residual/error regression (Res SS) = Unexplained variation.
 Total variation = Reg SS + Res SS
DEGREES OF FREEDOM (df)
 Regression df=number of independent variables
 Residual df= n-k
 Total df = (n-1) =Reg df +Res df
MEAN SUM OF SQUERE ( MSS)=sum of square ÷ degree of freedom.
Reg MSS=Reg SS ÷ Reg df
Res MSS= Res SS ÷ Res df
F calculated=Reg MSS ÷ Res MSS
F significant/critical=0

TABLE OF COEFFICIENT/ PARAMETER COEFFICIENT

 Constant (a)
 Coefficient /estimates (b)-this indicates the sensitivity or the change in independent
variable when independent variable is changed by one unit.
 Standard error= (sb)
 T cal= b÷sb
 Adjusted R2=1- Res SS/Res Df
Total SS/total Df
Or R2= 1- (1-r2) n-1 (total df)
n-k (residual df)
NB
1. T test shows whether the equation/independent variable is significant or insignificant.
The decision on hypothesis is done as follow:
Hypothesis: Ho: X is not a significant determinant of Y.
Ha: X is a significant determinant of Y.
T critical=t (α/2)(n-k)
Ie if u reject, this means the model is significant and when we accept that means the
model is insignificant.
2. F test indicates whether the model is suitable.
3. We use coefficient/estimates b to develop the model equation eg

CPAK JOHNMARK 0705748300 Page 28

 Assume a study was carried out to determine KCE student performance (y).the key
considerations were handwriting(x1) and class attendance(x2). The model portrayed the
following equation.

Y=a + b1x1 +b2x2

Y= 0.94-0.34x1+1.34x2
Interpret the above model:
 0.94 –this means that the 94% of the student performance is explained by other
factor other than handwriting and class attendance or changes in performance
which does not depend on handwriting and class attendance
 -0.34 this is the decrease in student performance if handwriting increase by one
unit.
 1.34-this is the increase in student performance if class attendance increases by a
unit.
Difference between one way ANOVA and two ways ANOVA.
With one way ANOVA, there is only one independent variable affecting a dependent variable
while with two way ANOVA, there are two independent variables affecting dependent variable
Assumptions of two ways ANOVA
a. The population must be close to a normal distribution
b. Sample must be independent
c. Population variance must be equal
d. Groups must have equal sample sizes

CPAK JOHNMARK 0705748300 Page 29