Operations and Production Management

MGMT 405

Answer set 4

MGMT 405 Operations and Production Management

Answer set 4
(Reference chapters 3 William J. Stevenson-2007, ninth edition)
Problems and Solutions
1. Using the following data set and
Sales

Advertising
1

1.3
1.6
2
2.5
3

0
2
4
6
8
10

(a) Plot the relationship between sales and advertising and also shows the data points
on a graph.
(b) Write theoretically an equation of the form that describes the relationship in the
graph. (i.e., y=.)
(c) Determine the regression equation of the firms sales revenue (Y) on its
advertising expenditure (X).
(d) Calculate the values of Y for X=$0, $5, $10 and $15 million respectively and
briefly explain why would you not to be confident in the reliability of the
estimated value of Y for X=15?

2010/11, Sami Fethi, EMU, All Right Reserved, McGraw-Hill, 2007, 9. Ed.

Operations and Production Management

MGMT 405

Answer set 4

Ans:
(a)

(b) y= a + bx where a is the value of y when x=0 (i.e., where the line intersects the yaxis) and b is the slope of the line (the amount by which y changes for a one-unit
change in x).
(c) y=1 + 0.2 x, a=1 and b=(3-1)/(10-0)=0.2, . Where =(3-1) is the change in y, and
(10-0) is the change in x.
(d) y=1 + 0.2 (5)=2, y=1 + 0.2 (10)=3, y=1 + 0.2 (15)=4
2010/11, Sami Fethi, EMU, All Right Reserved, McGraw-Hill, 2007, 9. Ed.

Operations and Production Management

MGMT 405

Answer set 4

We are not confident in the reliability of the estimated value of Y for X=15 because 4 is
out of the data series.

2. The owner of a small hardware store has noted a sales pattren for window
locks that seems to parallel the number of break-ins reported each week in the
newspaper. The data are:

Sales

46

18

20

22

27

34

14

37

30

Break-ins

(a) Plot the data to determine which type of equation, linear or nonlinear is
appropriate.
(b) Obtain a regression equation for the data.
(c) Estimate sales when the number of break-ins is five as well as ten.
Ans:
(a)

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Operations and Production Management

MGMT 405

Answer set 4

The graph supports a linear relationship.

(b)
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations

Intercept

0.927622591
0.860483672
0.840552768
4.09223514
9

Coefficients
(a) 7.129213483

Standard Error
3.394834629

t Stat
2.100018

2010/11, Sami Fethi, EMU, All Right Reserved, McGraw-Hill, 2007, 9. Ed.

Operations and Production Management

Break-ins (X)

Observation
1
2
3
4
5
6
7
8
9

MGMT 405

Answer set 4

(b) 4.275280899

0.650664086

Forecast (Y)
45.60674157
19.95505618
19.95505618
28.50561798
24.23033708
37.05617978
15.67977528
32.78089888
24.23033708

Error
0.393258427
-1.95505618
0.04494382
-6.505617978
2.769662921
-3.056179775
-1.679775281
4.219101124
5.769662921

6.570642

(c) Y= 7.129+ 4.275 (5)= 28.5 is within the data series.

Y= 7.129+ 4.275 (10)= 49.9 is out of the data series.
3. The manager of a seafood restaurant was asked to establish a pricing policy on
lobster dinners. Experimenting with prices produced the following data:

DAY(t)

Average number
sold per day (y)

Price (x)

DAY(t)

Average number
sold per day (y)

Price (x)

200

$6

160

190

6.5

155

8.25

188

6.75

156

8.50

180

10

148

8.75

170

7.25

11

140

162

7.50

12

133

9.25

2010/11, Sami Fethi, EMU, All Right Reserved, McGraw-Hill, 2007, 9. Ed.

Operations and Production Management

MGMT 405

Answer set 4

a) Estimate the regression equation of the restaurants lobster (Y) lobster on price
(X)
b) Plot the estimated regression line and also shows the data points on a graph .
c) Calculate the values of Y for X=$5 and $10 respectively and briefly explain
why would you not to be confident in the reliability of the estimated value
of Y for X=5 and X=10?
d) Calculate the standard error and t-test of the slope parameter.
e) Calculate the adjusted coefficients determination (R2 ) and overall statistical
significance (F-value).
f) Determine the correlation coefficient and interpret it.

Ans:

(a)
t

$X

1
2
3
4
5
6
7
8
9
10
11
12

200
190
188
180
170
162
160
155
156
148
140
133

6
6.5
6.75
7
7.25
7.5
8
8.25
8.5
8.75
9
9.25

1982
Y

92.75
X

165.1666667

7.729166667

X*Y

X-Xbar

(X-Xbar)

1200

40000

36

-1.72917

2.990017

1235

36100

42.25

-1.22917

1.510851

1269

35344

45.5625

-0.97917

0.958767

1260

32400

49

-0.72917

0.531684

1232.5

28900

52.5625

-0.47917

0.229601

1215

26244

56.25

-0.22917

0.052517

1280

25600

64

0.270833

0.073351

1278.75

24025

68.0625

0.520833

0.271267

1326

24336

72.25

0.770833

0.594184

1295

21904

76.5625

1.020833

1.042101

1260

19600

81

1.270833

1.615017

1230.25

17689

85.5625

1.520833

2.312934

15081.5
XY

332142
Y

729.0625
X

-3.6E-15

12.18229

b=

n xy x y
-19.56

n x 2 x

Y b X

316.35

2010/11, Sami Fethi, EMU, All Right Reserved, McGraw-Hill, 2007, 9. Ed.

Operations and Production Management

Y^

e(Y-Y^)

Y-Ybar

MGMT 405

(Y-Ybar)

Y^-Ybar

Answer set 4

(Y^-Ybar)

198.99

1.01

1.0201

34.83333

1213.361

33.82333

1144.0179

189.21

0.79

0.6241

24.83333

616.6944

24.04333

578.08188

184.32

3.68

13.5424

22.83333

521.3611

19.15333

366.85018

179.43

0.57

0.3249

14.83333

220.0278

14.26333

203.44268

174.54

-4.54

20.6116

4.833333

23.36111

9.373333

87.859378

169.65

-7.65

58.5225

-3.16667

10.02778

4.483333

20.100278

159.87

0.13

0.0169

-5.16667

26.69444

-5.29667

28.054678

154.98

0.02

0.0004

-10.1667

103.3611

-10.1867

103.76818

150.09

5.91

34.9281

-9.16667

84.02778

-15.0767

227.30588

145.2

2.8

7.84

-17.1667

294.6944

-19.9667

398.66778

140.31

-0.31

0.0961

-25.1667

633.3611

-24.8567

617.85388

135.42

-2.42

5.8564

-32.1667

1034.694

-29.7467

884.86418

143.3835

1.14E-13

1982.01

-0.01

Sb = 0.986

R
2

4781.667

0.01

4660.8668

143.38/(12-10)(12.18)

(Y Y ) 2

(Y

Y )

(Y Y )
(n k ) ( X X )
0.987
t

4660.86

4781.66

2010/11, Sami Fethi, EMU, All Right Reserved, McGraw-Hill, 2007, 9. Ed.

Operations and Production Management

t=

19.56/0.986

MGMT 405

Answer set 4

19.83

Y=a+bX
Y= 316.35-19.56X
(b)

2010/11, Sami Fethi, EMU, All Right Reserved, McGraw-Hill, 2007, 9. Ed.

Operations and Production Management

MGMT 405

Answer set 4

(c) Y= 316.35-19.56(5)=218.55 is out of the data series.

Y= 316.35-19.56(10)=120.75 is out of the data series.
So we are not confident in the reliability of the estimated value of Y for Xs.
(d)

Sb =

(Y Y )
(n k ) ( X X )
t

Sb = 0.986
and

143.38/(12-10)(12.18)

t=b/ Sb=
t=

19.56/0.986

19.83

(e)

(Y Y )
(Y Y )

R2

=4660.86/4781.66=0.987

It appears that approximately 98% of the variation in sales can be accounted for by the price of
our product. This indicates that price is a good predictor of sales.

R 2 /(k 1)
(1 R 2 ) /(n k )

F= (0.98/ (2-1)) / ((1-0.98)/ (12-2)) =490

(f)

r R 2 with the sign of b

2010/11, Sami Fethi, EMU, All Right Reserved, McGraw-Hill, 2007, 9. Ed.

Operations and Production Management

MGMT 405

Answer set 4

r=0.99
0r
n( xy ) ( x )( y

n( x 2 ) ( x ) 2

n( y 2 ) ( y ) 2

r= (12)(15081)-(92.75)(1982)/(12)(729.06)- (92.75)2 (12)(332142)-(1982)=-0.99

When we use the formula above, we can not only find its value but also its sign.
means a high and negative relationship between price and sale (quantity demanded).
4. Long life Insurance has developed a linear model that it uses to determine the
amount of term life insurance a family of four should have based on the current age
of the household. The equation is:

Y = 150 0.1 X
Where
Y= insurance needed ($000).
X= current age of head of household.
(a) Plot the relationship on a graph.
(b) Use the equation to determine the amount of term life insurance to recommend for
a family of four if the head of the household is 30, 40, and 50 years old. Briefly
explain.

Ans:
(a) Give some values for X and find the corresponding values for Y.
Y
150
149

X
0
10

2010/11, Sami Fethi, EMU, All Right Reserved, McGraw-Hill, 2007, 9. Ed.

10

Operations and Production Management

148
147
146

MGMT 405

Answer set 4

20
30
40

(b)

Y = 150 0.1 (30)=147

Y = 150 0.1 (40)=146
Y = 150 0.1 (50)=145
As long as the age increases, the amount of insurance decreases. There is a
inverse relationship between the two variable under consideration.

2010/11, Sami Fethi, EMU, All Right Reserved, McGraw-Hill, 2007, 9. Ed.

11