CHARTERED ACCOUNTANTS EXAMINATIONS

LICENTIATE LEVEL
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L5: DECISION MAKING TECHNIQUES
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WEDNESDAY 16 DECEMBER 2015
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TOTAL MARKS 100: TIME ALLOWED: THREE (3) HOURS
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INSTRUCTIONS TO CANDIDATES
1.

You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question. You will be told when to
start writing.

2.

There are SEVEN questions in this paper.

questions. ALL questions carry equal marks.

3.

Enter your student number and your National Registration Card number on the front of
the answer booklet. Your name must NOT appear anywhere on your answer booklet.

4.

Do NOT write in pencil (except for graphs and diagrams).

5.

Cell Phones are NOT allowed in the Examination Room.

6.

The marks shown against the requirement(s) for each question should be taken
as an indication of the expected length and depth of the answer.

7.

All workings must be done in the answer booklet.

8.

Present legible and tidy work.

9.

Graph paper (if required) is provided at the end of the answer booklet.

You are required to attempt any FIVE

Attempt any five (5) questions in this paper.

QUESTION ONE
(a) A husband and a wife appear in an interview for two vacancies in the same post. The
probability of husbands selection is

1
1
and that of wifes selection is
. Find the
7
5

probability that:
(i)
(ii)
(iii)
(b)

(2 marks)
(2 marks)
(2 marks)

In a razor blade factory, machines A, B and C manufacture 25%, 35% and 40% of the
total output respectively. Of their outputs, 5%, 4% and 2% are defective razor blades. A
razor blade is chosen at random and found to be defective.
(i)
(ii)

(c)

Both of them will be selected.

Only one of them will be selected.
None of them will be selected.

Find the probability that the razor blade is defective.

A razor blade is selected at random and it is found to be defective.
Find the probability that it was manufactured by machine B.

(3 marks)
(2 marks)

The XYZ Furniture Company produces chairs and tables from two resources, labour and
wood. The company has 80 hours of labour and 36 pounds of wood available each day.
Demand for chairs is limited to 6 per day. Each chair requires 8 hours of labour and 2
pounds of wood, whereas a table requires 10 hours of labour and 6 pounds of wood.
The profit derived from each chair is K400 and from each table is K100. The company
wants to determine the number of chairs and tables to produce each day in order to
maximize profit.
(i)
(ii)

Formulate a linear programming model for this problem

Solve the model by using graphical method.

(3 marks)
(6 marks)
[TOTAL: 20 Marks]

QUESTION TWO
(a)

The maintenance cost and resale value per year of a machine whose purchase price is
K7,000 is given below.
Year

Maintenance cost
(K)

900

1,200 1,600 2,100

Resale value (K)

4,000 2,000 1,200 600

2,800 3,700

4,700

5,900

500

400

400

After how many years should the machine be replaced?

(b)

400

(12 marks)

If the probability that it is a fine day is 0.4, find

(i)
(ii)

(c)

The expected number of fine days in a week

The standard deviation of fine days in a week

(2 marks)
(2 marks)

The mean number of bacteria per millilitre of a liquid is known to be 4. Assuming that
the number of bacteria follows a Poisson distribution, find the probability that, in 1
millilitre of liquid, there will be
(i)
(ii)

no bacteria
4 bacteria

(2 marks)
(2 marks)
[TOTAL: 20 Marks]

QUESTION THREE
An investigator obtains scores for a persons age in years and their score on a measure of
memory function. Higher scores on the memory task reflect better memories. The investigator
has predicted that the two variables will be significantly correlated. Using the data presented
below, please address the following questions:
Age

Memory

23

16

45

18

18

21

61

56

12

79

41

15

33

10

67

30

14

Required:
(a)
(b)
(c)
(d)

Calculate the least squares regression equation.

(9 marks)
Calculate the product moment correlation coefficient and interpret your result.
(5 marks)
Compute the coefficient of determination and interpret your result.
(4 marks)
Explain one limitation of linear regression analysis.
(2 marks)
[Total: 20 Marks]

QUESTION FOUR
(a)

KASTA Mutual Fund has K600,000 for one of the three investment options in the stock
market a growth fund, government bonds or a blue chip company. KASTA feels that
the stock market can assume the states as listed below. The companys estimate of the
associated payoffs is also given in the table

Type of
investment
Growth fund
Government
bonds
Blue Chip
Company

Stock market trend

Moderate growth Moderate decline

Boom

Collapse

475 000
600 000

250 000
200 000

-60 000
-350 000

-500 000
-600 000

350 000

200 000

-400 000

Using the minimax regret criterion, decide which option KASTA should adopt.
(5 marks)
(b) A wholesaler stocks an item for which demand is uncertain. He wishes to assess two
re ordering policies: to order 10 units at reorder level of 10 orders, 15 orders at a reorder
level of 15 orders, to see which is most economical over a 10 day period.
The following information is available
Demand per day (units)
4
5
6
7
8

Probability
0.15
0.25
0.30
0.20
0.10

Carrying costs K10 per unit per day. Ordering cost K50 per order. Loss of goodwill for each unit
out of stock is K30. Lead time 3 days. Opening stock is 17 units. The probability distribution is
to be based on the following random numbers
63 88 55 46 55 69 13 17 36 81
84 63 70 06 20 41 72 37 53 90
Note: the reorder level is physical stock plus any replenishment outstanding.
Required:
Determine the most economic order policy

(15 marks)
[Total: 20 Marks]
5

QUESTION FIVE
(a)

(b)

A university administrator wishes to estimate within 0.05 and with 95% confidence the
proportion of students enrolled in MBA programs and have undergraduate degrees in
business.
(i)

Find the sample size to be collected, as minimum, if there is no basis for

estimating the approximate value of the proportion before the sample is taken.
(5 marks)

(ii)

Find the minimum sample size required if prior data and information indicate that
the proportion will be no larger than 0.20.
(5 marks)

Suppose that 30% of the employees in a large firm are in favour of union
representation, and a random sample of 8 employees are contacted and asked for an
anonymous response.
Find the probability that:
(i)

A majority of the respondents will be in favour of union representations.

(5 marks)

(ii)

Fewer than half of the respondents will be in favour of union representation.

(5 Marks)
[Total: 20 Marks]

QUESTION SIX
(a) Four types of advertising display were set up in 12 retail outlets, with three outlets
randomly assigned to each of the displays, for the purpose of studying the point of
sale impact of the displays. With reference to the data in the table below test the null
hypothesis that there are no differences among the mean sales values for the four types
of displays, using 5% level of significance.
Type display
A
B
C
D

Sales
45
58
53
53

49
59
43
66

48
64
51
52

Total sales
142
181
147
171
(14 marks)

(b) The amount of time required for car transmission service is normally distributed with the
mean = 46 and the standard deviation = 9.0 . The service manager
plans to have work begin on the transmission of a customers car 12 minute after the
car is dropped off, and the customer is told that the car will be ready within 1 hour total
time.
Find the probability that the service manager will be wrong.

(6 marks)
[Total: 20 Marks]

QUESTION SEVEN
(a)

The monthly incomes of a large group of middle managers are normally distributed with
a mean of K800 and a standard deviation of K45.
Find the:
(i)
probability of finding a middle manager with a weekly income of between K750
and K850.
(3 marks)
(ii)
percentage of middle managers that earn less than K905.
(3 marks)
(iii)
limit of income above which the top 10% of the managers earn.
(4 marks)

(b)

A project consists of a series of tasks labeled A, B, C, D, E, F, G, H, I with the following

relationships ( W X , Y means X and Y cannot start until W is completed; X , Y W
means W cannot start until both X and Y are completed). With this notation construct
the network diagram having the following constraints:

A D, E; B, D F ; C G; B H ; F , G I

(c)

(6 marks)

In a certain factory producing cycle tyres, there is a small chance of 1 in 500 tyres to be
defective. The tyres are supplied in lots of 10. Using Poisson distribution, calculate the
approximate number of lots containing two defective tyres.
(4 marks)
[Total: 20 Marks]

END OF PAPER

L5: DECISION MAKING TECHNIQUES

SUGGESTED SOLUTIONS
DECEMBER 2015 EXAMINATIONS

SOLUTION ONE
(a) P (husbands selection)
P (wifes selection)

1
7

1
5

(i)

1 1 1
P (both selected)
7 5 35

(ii)

P (only one selected) P (only husbands selection) P (only wifes

selection)
1 4 1 6

7 5 5 7

10
35
2

(iii)

P (none of them will be selected

6 4

7 5

24
35

(b)
(i)

Use total probability for A, B and C from a partition because they are
disjoint
Let A = event that a razor blade was manufactured by machine A
B = event that a razor blade was manufactured by machine B
C = event that a razor blade was manufactured by machine C
D = event that the selected razor blade is defective
P A 0.25, P B 0.35 and P C 0.40
8

P D / A 0.05, P D / B 0.04 and P D / C 0.02

P D P A P D / A P B P D / B P C P D / C

0.25 0.05 0.35 0.04 0.4 0.02

0.0345
P B / D

(ii)

P B P D / B
P D

0.35 0.04
0.0345
0.4058

(c) (i) Let x1 number of chairs the company can produce each day

x2 number of tables the company can produce each day

Maximize

Z 400 x1 100 x2

Subject to

8x1 10 x2 80

(labour constraint)

2 x1 6 x2 36

(would constraint)

x1 6

(demand for chairs)

Where x1 , x2 0
(ii)

8x1 10 x2 80

Tables of values
2 x1 6 x2 36 . 1 mark
.. 1 mark

x1

10

x2

x1

18

x2

Test point 0, 0

0 80 (True)

0 36 (True)

x1 6
x2 3.2
Z max 2720
Therefore, the company should produce 6 chairs and 3 tables in order to make
the profit of K2,720.

10

SOLUTION TWO
(a) Capital cost C K 7,000 . Let it be profitable to replace the machine after n
years. Then n should be determined by the minimum value of T. Values of T for
various years are computed in the table below.

(1)

(2)

(3)

(4)

(5)

Year
Resale Purchase Annual
of
value price
maintenance
service S
resale
cost f t
value
n
k
k
CS

(6)

Summation
Total cost
n
of

f t

maintenance
t 0

n
cost
f t k

t 0

(7)
Average annual
cost
n
1

f t

n
t 0

4,000

3,000

900

900

3,900

3,900

2,000

5,000

1,200

2,100

7,100

3,550

1,200

5,800

1,600

3,700

9,500

3,166.67

600

6,400

2,100

5,800

12,200

3,050

500

6,500

2,800

8,600

15,100

3,020

400

6,600

3,700

12,300

18,900

3,150

400

6,600

4,700

17,000

23,600

3,371.43

400

6,600

5,900

22,900

29,500

3,687.50

We observe from the table that average annual cost is minimum (K3, 020) in the
5th year. Hence the machine should be replaced at the end of 5 years of service
(b)
(i)

p 0.4 and q 1 p 0.6

Let X be the random variable the number of fine days in a week.

The X Bin n, p where n 7 and p 0.4
Now E X np 7 0.4 2.8
11

(ii)

Var X npq 7 0.4 0.6 1.68

Standard deviation 1.68 1.30 days

(c)
(i)

Let X be the random variable the number of bacteria in 1ml of liquid

Then X P0 4 so that

e4 4 x
P X x
, x 0,1, 2,...
x!
P X 0

(ii)

P X 4

e4 40
e4 0.0183
0!

e4 44
0.195
4!

12

SOLUTION THREE
(a)
X

XY

X2

Y2

23

16

368

529

256

45

18

810

2025

324

18

21

378

324

441

61

549

3721

81

56

12

672

3136

144

79

711

6241

81

41

15

615

1681

225

33

10

330

1089

100

67

536

4489

64

30

14

420

900

196

453

132

5389

24135

1912

453 * 132
10
b
4532
24135
10
590.6

3614.1
0.1634
5389

132
453
0.1634

10
10
20.602
a

13

y 20.602 0.1634 x
(b)

105389 453132

1024135 453 101912 132

2

5906
7829.121023
0.7544

(c) (i) Coefficient of determination = (-0.7544) x 100% = 56.9%.

(ii) Therefore 56.8% of the memory function can be attributed to a persons age in years.
There is an assumption that there is always one independent variable when in fact more than
one independent variable can affect the dependent variable.

SOLUTION FOUR
(a)
Table of Regret (Amounts are in thousands of kwacha)
Type of
investment
Growth fund
Government
bonds
Blue Chip
Company

125
0

Stock
Moderate
growth
0
50

250

50

Boom

market trend
Moderate
Collapse
decline
60
100
350
200
0

Adopt the Growth fund

14

Maximum

Min

125
350

125

250

(b)
The random numbers are allocated to the demand as follows
Demand

Probability

4
5
6
7
8

0.15
0.25
0.30
0.20
0.10

Cumulative
Probability
0.15
0.40
0.70
0.90
1.00

Random number
intervals
00 14
15 39
40 69
70 89
90 99

Random numbers for order quantity of 15 units

Random 63
numbers
demand 6

88

55

46

55

69

13

17

36

81

Results of the simulation using order quantity and reorder level of 15 units.
Day

Opening
stock

Demand

Closing
stock

1
2
3
4
5
6
7
8
9
10

17
11
4
+15
9
3
+15
11
6
+15+1

6
7
6
6
6
6
4
5
5
7

11
4

Order
costs
@K50
K50

Carrying
costs
@K15
K165
K60

Stock out
Total
costs@K30 cost

K60
9
3

K50

K135
K45
K90

11
6
1
9

K50

K150

15

K165
K90
K15
K135
K810

K150

215
60
60
185
45
90
215
90
15
135
K1110

Random numbers for order quantity of 15 units

Random 84
numbers
demand 7

63

70

06

20

41

72

37

53

90

Results of the simulation using order quantity and reorder level of 10 units.
Day

Opening
stock

Demand

Closing
stock

1
2
3
4
5
6
7
8
9
10

17
10
4
+10
6
1
+10
3
+10

7
6
7
4
5
6
7
5
6
8

10
4

Order
costs
@K50
K50

Carrying
costs
@K15
K150
K60

Stock out
Total
costs@K30 cost

K90
6
1

K50

K50

K15
K150
K45
K60
K180

K50
K200

K30
K300

K480

200
60
90
50
15
150
95
60
180
80
K980

The simulation shows that the order 10 policy is more economical over the ten days
simulated.

SOLUTION FIVE
(a)(i) The sample size occurs at a point of maximum sample size where
= = 0.5; and
= 0.05; where = 0.05
= 2
=

0.25
2

(1.96)2 (0.25)
(0.05)2

= 384.16
385

16

(ii)

= 0.20;

= 0.80

= 0.05
= 2
=

= 0.05

(1.96)2 (0.20)(0.80)
(0.05)2

= 245.8624
246

(b)(i)

= 0.30;

= 0.70

8
( 5) = ( ) (0.30) (0.70)8

=5

= 0.04668 + 0.0100 + 0.00122472 + 0.00006561

= 0.05797

(ii)
3

3
( 3) = ( ) (0.30) (0.70)8

=0

= 0.0576 + 0.1977 + 0.2965 + 0.2541

= 0.8059

17

=8

SOLUTION SIX
(a)
= 34799
( ) =

(641)2
= 558.917
12

(142)2 + (181)2 + (147)2 + (171)2 (641)2

= 351.584
3
12
= 55.917 351.584 = 207.334

Source of
variation
SS(Type
display)
SSE
SSTO

SS

Df

Ms

351.584

117.19

207.333
558.917

8
11

25.92

4.52

Reject the null hypothesis 4.52 is greater 0.05,3,8 = 4.07 and conclude that there are
differences among the mean sales values for the four types of display.

(b)
() = ( > 48) , since actual work is to begin in 12 minutes
=

48 46 2
=
= 0.2222

9
9

( > 48) = ( > 0.222) = 0.5 0.0871 = 0.4129

18

SOLUTION SEVEN
(a)

Let X be the random variable the monthly income of middle managers.

Then X N 800, 45
X 800
45
750 800 X 800 850 800
P 750 X 850 P

45
45
45

We standardize X so that Z
(i)

P 1.11 Z 1.11
1 Q 1.11 Q 1.11
1 2Q 1.11

1 2 0.1335

0.7330
(ii)

X 800 905 800

P X 905 P

45
45

P Z 2.333

1 Q 2.333

1 0.0099
0.9901100%
99.01%
(iii)

P X a 0.1
X 800 a 800
P

0.1
45
45
a 800

P Z
0.1
45

a 800
Q
0.1
45
From tables
Q 1.28 0.1

So

a 800
1.28
45
a 800 45 1.28
a 800 57.6
19

a 57.6 800
a K 857.60
(b)

For the given precedence relationships, the project network shown below is
obtained since H is preceded by B while F is preceded by B and D, a dummy
activity must be incorporated to draw the network.

(c)

1
, n 10
500
1
1
np 10

0.02
500 50
P

P X x

e x
x!

e0.02 0.02
P X 2
2!
0.9802 0.0002
0.00019604
Number of lots containing 2 defectives
10,000 0.00019604
2

2 lots

END OF SOLUTIONS
20