Anderson Sweeney Williams

QUANTITATIVE
METHODS FOR
BUSINESS 8e

Slides Prepared by JOHN LOUCKS

© 2001 South-Western College Publishing/Thomson Learning Slide 1

 Chapter 1
Introduction
 Body of Knowledge
 Problem Solving and Decision Making
 Quantitative Analysis and Decision Making
 Quantitative Analysis
 Models of Cost, Revenue, and Profit
 Quantitative Methods in Practice
 The Management Scientist

Slide 2
 Body of Knowledge

 Quantitative methods for business involve rational

approaches to decision making based on the scientific
method of problem solving.
 This body of knowledge is often referred to as
management science, operations research or decision
science.
 It had its early roots in World War II and is
flourishing in business and industry with the aid of
computers.

Slide 3
 Problem Solving and Decision Making

 7 Steps of Problem Solving

(First 5 steps are the process of decision making)
• Identify and define the problem.
• Determine the set of alternative solutions.
• Determine the criteria for evaluating the alternatives.
• Evaluate the alternatives.
• Choose an alternative.
---------------------------------------------------------------------
• Implement the chosen alternative.
• Evaluate the results.

Slide 4
 Quantitative Analysis and Decision Making

 Potential Reasons for a Quantitative Analysis Approach

to Decision Making
• The problem is complex.
• The problem is very important.
• The problem is new.
• The problem is repetitive.

Slide 5
 Quantitative Analysis

 Quantitative Analysis Process

• Model Development
• Data Preparation
• Model Solution
• Report Generation

Slide 6
 Model Development

 Models are representations of real objects or

situations.
 Three forms of models are iconic, analog, and
mathematical.
• Iconic models are physical replicas (scalar
representations) of real objects.
• Analog models are physical in form, but do not
physically resemble the object being modeled.
• Mathematical models represent real world
problems through a system of mathematical
formulas and expressions based on key
assumptions, estimates, or statistical analyses.

Slide 7
 Advantages of Models

 Generally, experimenting with models (compared to

experimenting with the real situation):
• requires less time
• is less expensive
• involves less risk

Slide 8
 Mathematical Models

 Cost/benefit considerations must be made in

selecting an appropriate mathematical model.
 Frequently a less complicated (and perhaps less
precise) model is more appropriate than a more
complex and accurate one due to cost and ease of
solution considerations.

Slide 9
 Mathematical Models

 Relate decision variables (controllable inputs) with

fixed or variable parameters (uncontrollable inputs).
 Frequently seek to maximize or minimize some
objective function subject to constraints.
 Are said to be stochastic if any of the uncontrollable
inputs is subject to variation, otherwise are said to be
deterministic.
 Generally, stochastic models are more difficult to
analyze.
 The values of the decision variables that provide the
mathematically-best output are referred to as the
optimal solution for the model.

Slide 10
 Transforming Model Inputs into Output

Uncontrollable Inputs
(Environmental Factors)

Controllable
Mathematical Output
Inputs
Model (Projected Results)
(Decision Variables)

Slide 11
 Example: Project Scheduling

Consider a construction company building a 250-

unit apartment complex. The project consists of
hundreds of activities involving excavating, framing,
wiring, plastering, painting, landscaping, and more.
Some of the activities must be done sequentially and
others can be done simultaneously. Also, some of the
activities can be completed faster than normal by
purchasing additional resources (workers,
equipment, etc.).
What is the best schedule for the activities and
for which activities should additional resources be
purchased?

Slide 12
 Example: Project Scheduling

 Question:
How could management science be used to solve
this problem?
 Answer:
Management science can provide a structured,
quantitative approach for determining the minimum
project completion time based on the activities' normal
times and then based on the activities' expedited
(reduced) times.

Slide 13
 Example: Project Scheduling

 Question:
What would be the uncontrollable inputs?
 Answer:
• Normal and expedited activity completion times
• Activity expediting costs
• Funds available for expediting
• Precedence relationships of the activities

Slide 14
 Example: Project Scheduling

 Question:
What would be the decision variables of the
mathematical model? The objective function? The
constraints?
 Answer:
• Decision variables: which activities to expedite and
by how much, and when to start each activity
• Objective function: minimize project completion
time
• Constraints: do not violate any activity precedence
relationships and do not expedite in excess of the
funds available.

Slide 15
 Example: Project Scheduling

 Question:
Is the model deterministic or stochastic?
 Answer:
Stochastic. Activity completion times, both
normal and expedited, are uncertain and subject to
variation. Activity expediting costs are uncertain.
The number of activities and their precedence
relationships might change before the project is
completed due to a project design change.

Slide 16
 Example: Project Scheduling

 Question:
Suggest assumptions that could be made to
simplify the model.
 Answer:
Make the model deterministic by assuming normal
and expedited activity times are known with certainty
and are constant. The same assumption might be made
about the other stochastic, uncontrollable inputs.

Slide 17
 Data Preparation

 Data preparation is not a trivial step, due to the time

required and the possibility of data collection errors.
 A model with 50 decision variables and 25 constraints
could have over 1300 data elements!
 Often, a fairly large data base is needed.
 Information systems specialists might be needed.

Slide 18
 Model Solution

 Involves identifying the values of the decision variables

that provide the “best” output for the model.
 One approach is trial-and-error.
• might not provide the best solution
• inefficient (numerous calculations required)
 Special solution procedures have been developed for
specific mathematical models.
• some small models/problems can be solved by hand
calculations
• most practical applications require using a computer

Slide 19
 Computer Software

 A variety of software packages are available for solving

mathematical models.
• Spreadsheet packages such as Microsoft Excel
• The Management Scientist, developed by the textbook
authors

Slide 20
 Model Testing and Validation

 Often, the goodness/accuracy of a model cannot be

assessed until solutions are generated.
 Small test problems having known, or at least expected,
solutions can be used for model testing and validation.
 If the model generates expected solutions:
• use the model on the full-scale problem.
 If inaccuracies or potential shortcomings inherent in the
model are identified, take corrective action such as:
• collection of more-accurate input data
• modification of the model

Slide 21
 Report Generation

 A managerial report, based on the results of the model,

should be prepared.
 The report should be easily understood by the decision
maker.
 The report should include:
• the recommended decision
• other pertinent information about the results (for
example, how sensitive the model solution is to the
assumptions and data used in the model)

Slide 22
 Implementation and Follow-Up

 Successful implementation of model results is of critical

importance.
 Secure as much user involvement as possible
throughout the modeling process.
 Continue to monitor the contribution of the model.
 It might be necessary to refine or expand the model.

Slide 23
 Example: Austin Auto Auction

An auctioneer has developed a simple

mathematical model for deciding the starting bid he
will require when auctioning a used automobile.
Essentially, he sets the starting bid at seventy
percent of what he predicts the final winning bid will
(or should) be. He predicts the winning bid by starting
with the car's original selling price and making two
deductions, one based on the car's age and the other
based on the car's mileage.
The age deduction is $800 per year and the mileage
deduction is $.025 per mile.

Slide 24
 Example: Austin Auto Auction

 Question:
Develop the mathematical model that will give the
starting bid (B ) for a car in terms of the car's original
price (P ), current age (A) and mileage (M ).
 Answer:
The expected winning bid can be expressed as:
P - 800(A) - .025(M )
The entire model is:
B = .7(expected winning bid) or
B = .7(P - 800(A) - .025(M )) or
B = .7(P )- 560(A) - .0175(M )

Slide 25
 Example: Austin Auto Auction

 Question:
Suppose a four-year old car with 60,000 miles on
the odometer is up for auction. If its original price was
$12,500, what starting bid should the auctioneer
require?
 Answer:
B = .7(12,500) - 560(4) - .0175(60,000) = $5460.

Slide 26
 Example: Austin Auto Auction

 Question:
The model is based on what assumptions?
 Answer:
The model assumes that the only factors
influencing the value of a used car are the original
price, age, and mileage (not condition, rarity, or other
factors).
Also, it is assumed that age and mileage devalue a
car in a linear manner and without limit. (Note, the
starting bid for a very old car might be negative!)

Slide 27
 Example: Iron Works, Inc.

Iron Works, Inc. (IWI) manufactures two products

made from steel and just received this month's
allocation of b pounds of steel. It takes a1 pounds of
steel to make a unit of product 1 and it takes a2 pounds
of steel to make a unit of product 2.
Let x1 and x2 denote this month's production level
of product 1 and product 2, respectively. Denote by p1
and p2 the unit profits for products 1 and 2,
respectively.
The manufacturer has a contract calling for at least
m units of product 1 this month. The firm's facilities are
such that at most u units of product 2 may be produced
monthly.

Slide 28
 Example: Iron Works, Inc.

 Mathematical Model
• The total monthly profit =
(profit per unit of product 1)
x (monthly production of product 1)
+ (profit per unit of product 2)
x (monthly production of product 2)
= p1x1 + p2x2
We want to maximize total monthly profit:
Max p1x1 + p2x2

Slide 29
 Example: Iron Works, Inc.

 Mathematical Model (continued)

• The total amount of steel used during monthly
production =
(steel required per unit of product 1)
x (monthly production of product 1)
+ (steel required per unit of product 2)
x (monthly production of product 2)
= a1x1 + a2x2
This quantity must be less than or equal to the
allocated b pounds of steel:
a 1 x 1 + a 2 x2 < b

Slide 30
 Example: Iron Works, Inc.

 Mathematical Model (continued)

• The monthly production level of product 1 must be
greater than or equal to m :
x1 > m
• The monthly production level of product 2 must be
less than or equal to u :
x2 < u
• However, the production level for product 2 cannot
be negative:
x2 > 0

Slide 31
 Example: Iron Works, Inc.

 Mathematical Model Summary

Max p1x1 + p2x2

s.t. a1x1 + a2x2 < b
x1 > m
x2 < u
x2 > 0

Slide 32
 Example: Iron Works, Inc.

 Question:
Suppose b = 2000, a1 = 2, a2 = 3, m = 60, u = 720, p1
= 100, p2 = 200. Rewrite the model with these specific
values for the uncontrollable inputs.
 Answer:
Substituting, the model is:
Max 100x1 + 200x2
s.t. 2x1 + 3x2 < 2000
x1 > 60
x2 < 720
x2 > 0

Slide 33
 Example: Iron Works, Inc.

 Question:
The optimal solution to the current model is x1 = 60
and x2 = 626 2/3. If the product were engines, explain
why this is not a true optimal solution for the "real-life"
problem.
 Answer:
One cannot produce and sell 2/3 of an engine.
Thus the problem is further restricted by the fact that
both x1 and x2 must be integers. They could remain
fractions if it is assumed these fractions are work in
progress to be completed the next month.

Slide 34
 Example: Iron Works, Inc.

Uncontrollable Inputs
$100 profit per unit Prod. 1
$200 profit per unit Prod. 2
2 lbs. steel per unit Prod. 1
3 lbs. Steel per unit Prod. 2
2000 lbs. steel allocated
60 units minimum Prod. 1
720 units maximum Prod. 2
0 units minimum Prod. 2

60 units Prod. 1 Max 100(60) + 200(626.67) Profit = $131,333.33

626.67 units Prod. 2 s.t. 2(60) + 3(626.67) < 2000 Steel Used = 2000
60 > 60
Controllable Inputs 626.67 < 720 Output
626.67 > 0
Mathematical Model
Slide 35
 Example: Ponderosa Development Corp.

Ponderosa Development Corporation (PDC) is a

small real estate developer operating in the Rivertree
Valley. It has seven permanent employees whose
monthly salaries are given in the table on the next slide.
PDC leases a building for $2,000 per month. The
cost of supplies, utilities, and leased equipment runs
another $3,000 per month.
PDC builds only one style house in the valley.
Land for each house costs $55,000 and lumber, supplies,
etc. run another $28,000 per house. Total labor costs are
figured at $20,000 per house. The one sales
representative of PDC is paid a commission of $2,000 on
the sale of each house. The selling price of the house is
$115,000.
Slide 36
Example: Ponderosa Development Corp.

Employee Monthly Salary

President $10,000
VP, Development 6,000
VP, Marketing 4,500
Project Manager 5,500
Controller 4,000
Office Manager 3,000
Receptionist 2,000

Slide 37
 Example: Ponderosa Development Corp.

 Question:
Identify all costs and denote the marginal cost and
marginal revenue for each house.
 Answer:
The monthly salaries total $35,000 and monthly
office lease and supply costs total another $5,000. This
$40,000 is a monthly fixed cost.
The total cost of land, material, labor, and sales
commission per house, $105,000, is the marginal cost for
a house.
The selling price of $115,000 is the marginal
revenue per house.

Slide 38
 Example: Ponderosa Development Corp.

 Question:
Write the monthly cost function c (x), revenue
function r (x), and profit function p (x).
 Answer:
c (x) = variable cost + fixed cost = 105,000x + 40,000
r (x) = 115,000x
p (x) = r (x) - c (x) = 10,000x - 40,000

Slide 39
 Example: Ponderosa Development Corp.

 Question:
What is the breakeven point for monthly sales of
the houses?
 Answer:
r (x ) = c (x ) or 115,000x = 105,000x + 40,000
Solving, x = 4.
 Question:
What is the monthly profit if 12 houses per month
are built and sold?
 Answer:
p (12) = 10,000(12) - 40,000 = $80,000 monthly profit

Slide 40
 Example: Ponderosa Development Corp.

 Graph of Break-Even Analysis

1200
Thousands of Dollars

1000
Total Revenue = 115,000x Total Cost =
800
40,000 + 105,000x
600
Break-Even Point = 4 Houses
400
200
0
0 1 2 3 4 5 6 7 8 9 10
Number of Houses Sold (x)
Slide 41
The End of Chapter 1

Slide 42
What Is Break Even Analysis?

Break even analysis is a calculation of the quantity sold which generates

enough revenues to equal expenses. In securities trading, the meaning of
break even analysis is the point at which gains are equal to losses.

Another definition of break even analysis is the examination and calculation

of the margin of safety that’s based on a company’s revenue – as well as
the related costs of running the organization.
How Is Break Even Analysis Used?

A break-even analysis helps business owners determine when they'll begin

to turn a profit, which can help them better price their products. Usually,
management uses this metric to help guide strategic decisions to
grow/maintain the business.

Break-Even Analysis vs. Break-Even Point

Break-even analysis uses a calculation called the break even point (BEP)
which provides a dynamic overview of the relationships among revenues,
costs, and profits. More specifically, it looks at a company’s fixed costs in
relation to profits that are earned from each unit sold.

Break Even Analysis Varies Among Industries

Typical variable and fixed costs differ widely among industries. This is why
comparison of break-even points is generally most meaningful among
companies within the same industry. The definition of a 'high' or 'low' break-
even point should be made within this context.

Break Even Analysis Formula

The following formula can be used to calculate the number of units that a
business needs to sell in order to break even:
Fixed Costs

Fixed costs do not change with the quantity of output. In other words,
they’re not affected by sales. Examples include rent and insurance
premiums, as well as fees paid for marketing or loan payments.

Variable Costs

Variable costs change depending on the amount of output. Examples

include raw materials and labor that are directly involved in a company's
manufacturing process.

Contribution Margin

The contribution margin is the amount remaining (i.e. the excess) after total
variable costs are deducted from a product’s selling price.

Say that an item sells for $5,000 and your total variable costs are $3,000
per unit. Your contribution margin would be $2,000 (after subtracting
$3,000 from $5,000). This is the revenue that’ll be used to cover your fixed
costs – which isn’t considered when calculating the contribution margin.

Earned Profit

Earned profit is the amount a business earns after taking into account all
expenses. You can calculate this number by subtracting the costs that go
into your company’s operations from your sales.
Example of Break Even Analysis

In this break even analysis sample, Restaurant ABC only sells pepperoni
pizza. Its variable expenses for each pizza include:

 Flour: $0.50

 Yeast: $0.05

 Water: $0.01

 Cheese: $3.00

 Pepperoni: $2.00

Adding all of these costs together, we determine that it has $5.56 in

variable costs per pizza. Based on the total variable expenses per pizza,
Restaurant ABC must price its pizzas at $5.56 or higher to cover those
costs.

The fixed expenses per month include:

 Labor: $1,500

 Rent: $3,000

 Insurance: $200

 Advertising: $500

 Utilities: $450

In total, Restaurant ABC's fixed costs are $5,650.

Let’s say that each pizza is sold for $10.00. Therefore the contribution
margin is $4.44 ($10.00 - $5.56).
To determine the number of pizzas (or units) Restaurant ABC needs to sell,
take its fixed costs and divide them by the contribution margin:

$5,650 ÷ $4.44 = 1,272.5

This means the restaurant needs to sell at least 1,272.53 pizzas (rounded
up to 1,273 whole pizzas), to cover its monthly fixed costs. Or, the
restaurant needs to have at least $12,730 in sales (1,272.5 x $10) to reach
the break-even point.

Note: If your product must be sold as whole units, you should always round
up to find the break-even point.

Remember: Fixed Costs Can Increase

Some fixed costs increase after a certain level of revenue is reached. For
example, if Restaurant ABC begins selling 5,000 pizzas per month – rather
than 2,000 – it might need to hire a second manager, thus increasing labor
costs.

Break-Even Analysis Benefits

Break-even analysis is a great way to determine a business’ profitability. It

can show business owners and management how many units need to be
sold in order to cover both fixed and variable expenses. It also provides a
specific benchmark or goal so businesses not only survive but also remain
profitable.
STATISTICS

Aurora Rosalie P. Tolentino

aurora.tolentino@ub.edu.ph

UNIVERSITY OF BATANGAS
 What is/are Statistics?

In Singular sense
Statistics means the art or science which is concerned
with the collection, presentation, and analysis of
quantitative data so that intelligent judgment may be
formed upon them.

In Plural sense
Statistics means information useful to decision makers
such as statistics on employment and unemployment,
or vital statistics on births, deaths and marriages.
 What is a Statistic?

A statistic is a quantity calculated from the

observations on a sample and used to estimate
some characteristics of the parent population.
 Realities about Statistics
o The man in the street distrusts statistics and
despises [his image of] statisticians, those who
diligently collect irrelevant facts and figures and use
them to manipulate society.
“There are three kinds of lies: lies, damned lies, and
statistics”
Mark Twain

o One can not go about without statistics.

“Statistics are like bikinis. What they reveal is

suggestive, but what they conceal is vital.”
Aaron Levenstein
Realities about Statistics

I HOPE
THIS ISN’T
STATISTICS
 Statistical analysis

Come on! It can‘t go

wrong every time...
 Applications of Statistics

 describe the characteristic of the elements in the

population under study through the computation
or estimation of a parameter such as the
proportion, total, and average

 compare the characteristics of the elements in the

different subgroups in the population through
contrasts of their respective summary measures
 Applications of Statistics

 justify an assertion made by the researcher about a

particular characteristic of the population or
subgroups in the population

 determine the nature and strength of relationships

among the different variables of interest such as the
relationship of a person’s grade when he graduated
from college with his current income, or, the
relationship of a person’s calorie intake and aerobic
exercise with his weight
 Applications of Statistics

 identify the different groups of inter-related

variables under study
 reveal the natural groupings of the elements
in the population based on the values of a set
of variables
 determine the effects of one or more variables
on a response variable
 Applications of Statistics

 clarify patterns and trends in the values of a

variable over time or space
 predict future outcomes such as next year’s
GNP or next quarter’s demand for various
agricultural products
 Steps in a Statistical Inquiry
A
Step 1: Identify the problem.

Step 4: Explore the data.

Step 2: Plan the study.

Step 5: Analyze data and interpret

the results.
Step 3: Collect the data.

A Step 6: Present the results.

 Data and Information

Data is any set of observation

Information is limited to useful facts that

an analyst or a decision maker can use
 What is a variable?

A variable is a characteristic of an
observation that we can classify into at
least two categories

A value of a variable is one of the categories

into which we can classify the variable
 Types of Variables

In a survey, we may have

data on two types of VARIABLES
variables:
Categorical Numerical
o Categorical
- dwelling characteristics
(type of toilet),
- marital status Discrete Continuous
o Numerical
-number of rooms in a dwelling, amount of land owned,
income of members of household
 Operational Definition

When a procedure for determining the value of a

variable is clearly specified, the variable is said
to be operationally defined.
Example
Number of families provided with financial
assistance by type of livelihood project.
Variables:
o Number of families
o Financial assistance
o Type of livelihood project

Note: An indicator may contain one or more variables

 Operational Definitions
Family – Members of a household who are related by first
degree of consanguinity.

Financial assistance – assistance provided to project

beneficiaries in the form of loan or grant for the purpose of
implementing a livelihood project

Type of livelihood project – activities under the following categories

1) basket weaving
2) poultry,
3) piggery; and
4) sari-sari store
 Data and Observe Value
When the value of the variable is observed
and recorded, it is known as an observed
value.
The set of observed values is denoted by the
plural noun data.
 Types of Data Collection

1. Primary Data Collection

o Censuses
o Sample Surveys
2. Secondary Data Collection
 Methods of Collecting Data

 Objective Method

 Subjective
Method
 Use of Existing
Records
 Summary Measures

Location Variation Skewness

Percentile Kurtosis
Maximum Range
Quartile
Minimum Coefficient of
Decile
Variance Variation
Central
Tendency Interquartile
Range
Mean Mode
Standard Deviation
Median
 Properties of the Mean

o subgroup means can be combined to

come up with a group mean
o easily affected by extreme values

0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10 12 14

Mean = 5
Mean = 6
 Median
 Divides the observations into two equal
parts
 If n is odd, the median is the middle
number.
 If n is even, the median is the average of the
2 middle numbers.
 Properties of a Median

o may not be an actual observation in the data set

o can be applied in at least ordinal level

o a positional measure; not affected by extreme

values

0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10 12 14

Median = 5
 Mode
o occurs most frequently
o nominal average
o computation of the mode for ungrouped or raw
data

0 1 2 3 4 5 6
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
No Mode
Mode = 9
 Properties of a Mode

o can be used for qualitative as well as quantitative

data

o may not be unique

o not affected by extreme values

o may not exist

 Mean, Median & Mode

Use the mean when:

 sampling stability is desired
 other measures are to be computed
 Mean, Median & Mode

Use the median when:

 the exact midpoint of the distribution is
desired
 there are extreme observations
 Mean, Median & Mode

Use the mode when:

 when the "typical" value is desired
 when the dataset is measured on a
nominal scale
 Percentiles

o Numerical measures that give the relative

position of a data value relative to the entire
data set.
o Divide an array (raw data arranged in
increasing or decreasing order of
magnitude) into 100 equal parts.
o The jth percentile, denoted as Pj, is the data
value in the the data set that separates the
bottom j% of the data from the top (100-j)%.
 Example

Suppose Juanito was told that relative to the

other scores on a certain test, his score was
the 95th percentile.

 This means that 95% of those who took

the test had scores less than or equal to
Juanito’s score, while 5% had scores higher
than Juanito’s.
 Deciles
o Divide an array into ten equal parts,
each part having ten percent of the
distribution of the data values,
denoted by Dj.
o The 1st decile is the 10th percentile;
the 2nd decile is the 20th
percentile…..
 Quartiles

o Divide an array into four equal parts, each part

having 25% of the distribution of the data values,
denoted by Qj.

o The 1st quartile is the 25th percentile; the 2nd

quartile is the 50th percentile, also the median and
the 3rd quartile is the 75th percentile.
 Measures of Variation

o A measure of variation is a single value that is

used to describe the spread of the distribution

o A measure of central tendency alone does not

uniquely describe a distribution
A look at dispersion…

Data A

Mean = 15.5
11 12 13 14 15 16 17 18 19 20 21
s = 3.338

Data B
Mean = 15.5
11 12 13 14 15 16 17 18 19 20 21 s = .9258

Data C Mean = 15.5

s = 4.57
11 12 13 14 15 16 17 18 19 20 21
Two Types of Dispersion Measures
Absolute Measures of Dispersion:
 Range
 Inter-quartile Range
 Variance
 Standard Deviation

Relative Measure of Dispersion:

 Coefficient of Variation
 Range (R)
The difference between the maximum and
minimum value in a data set, i.e.
R = MAX – MIN

Example: Pulse rates of 15 male residents of a

certain village
54 58 58 60 62 65 66 71
74 75 77 78 80 82 85

R = 85 - 54 = 31
Some Properties of the Range
o The larger the value of the range, the
more dispersed the observations are.

o It is quick and easy to understand.

o A rough measure of dispersion.

 Variance

o important measure of variation

o shows variation about the mean

 Standard Deviation (SD)
o most important measure of variation
o square root of Variance
o has the same units as the original data
 Computing SD

Data: 10 12 14 15 17 18 18 24

n=8 Mean =16

(10  16) 2  (12  16) 2  (14  16) 2  (15  16) 2  (17  16) 2  (18  16) 2  ( 24  16) 2
s
7
 4.309
 Remarks on SD

o If there is a large amount of variation, then

on average, the data values will be far from
the mean. Hence, the SD will be large.

o If there is only a small amount of variation,

then on average, the data values will be
close to the mean. Hence, the SD will be
small.
 Comparing SDs

Data A
Mean = 15.5
11 12 13 14 15 16 17 18 19 20 21 s = 3.338
Data B
Mean = 15.5
11 12 13 14 15 16 17 18 19 20 21 s = .9258
Data C
Mean = 15.5
11 12 13 14 15 16 17 18 19 20 21 s = 4.57
 Comparing SDs

Example: Team A - Heights of five marathon players in inches

Mean = 65
S =0

65 “ 65 “ 65 “ 65 “ 65 “
 Comparing SDs

Example: Team B - Heights of five marathon players in inches

Mean = 65”
s = 4.0”

62 “ 67 “ 66 “ 70 “ 60 “
 Properties of SD
 It is the most widely used measure of dispersion.

 It is based on all the items and is rigidly defined.

 It is used to test the reliability of measures calculated from

samples.

 The standard deviation is sensitive to the presence of extreme

values.

 It is not easy to calculate by hand (unlike the range).

 Coefficient of Variation (CV)

o measure of relative variation

o usually expressed in percent
o shows variation relative to mean
o used to compare 2 or more groups
Formula :

 SD 
CV     100%
 Mean 
 Comparing CVs

 Stock A: Average Price = P50

SD = P5
CV = 10%

 Stock B: Average Price = P100

SD = P5
CV = 5%
 Measure of Skewness
o Describes the degree of departures of the
distribution of the data from symmetry.
o The degree of skewness is measured by the
coefficient of skewness, denoted as SK and
computed as,

3Mean  Median
SK 
SD
 What is Symmetry?
A distribution is said to be
symmetric about the mean, if
the distribution to the left of
mean is the “mirror image” of
the distribution to the right of
the mean. Likewise, a
symmetric distribution has
SK=0 since its mean is equal to
its median and its mode.
Measure of Skewness

SK < 0
positively skewed

SK < 0
negatively skewed
 Measure of Kurtosis
 Describes the extent of peakedness or flatness of the
distribution of the data

 Measured by coefficient of kurtosis (K) computed as,

X  
4
i

K  i 1
4
3
N
Measure of Kurtosis

K=0
mesokurtic

K>0 K<0
leptokurtic platykurtic