GABORONE UNIVERSITY COLLEGE OF LAW AND PROFESSIONAL STUDIES

CERTIFICATE IN PURCHASING AND SUPPLY

MODULE 4: BUSINESS STATISTICS

1
Module Overview

This module introduces students to the fundamental concepts of data presentation and analysis in
management decision making. The approach will emphasize a practical management problem
solving approach using quantitative reasoning skills rather than the theoretical development of
statistics. Students should develop quantitative research techniques for research writing.

CHAPTER 1. BASIC NUMERICAL CONCEPTS

 Work with numbers systems and perform calculations

 Perform Approximation with figures
 Perform calculations with Negative numbers
 Use decimals and fractions
 Percentages
 Ratios
CHAPTER 2. ALGEBRA, EQUATIONS AND FORMULAE

 Give Definitions of terms used in algebra

 Solve Algebraic equations
 Solving linear equations
 Use formulae to solve business problems
 Solve Quadratic equations
 Solve Simultaneous equations
CHAPTER 3. BASIC BUSINESS APPLICATIONS

 Calculate Currencies and exchange rates

 Calculate Discounts and commissions
 Calculate future value of principle money invested using Simple interest
 Calculate future value of principle money invested using compound interest
 Calculate future value of principle money invested using Annuity tables
 Calculate income tax from different pay scales.

CHAPTER 4: STATISTICS AND DATA ANALYSIS AND DATA PRESENTATIONS

 Discuss the different Methods of collecting data

2
  Distinguish the different Types of data
 Tabulation of data
 present data on Frequency distribution, Pictograms ,Pie charts ,Bar charts
 Observe the general rule of graphical presentations

CHAPTER 5. MEASURES OF LOCATION AND MEASURES OF DISPERSION

 Calculate the mean for raw ad grouped data

 Calculate the mode for raw and grouped data
 Calculate The median for raw and grouped data
 Calculate Range for raw and grouped data
 Calculate Quartile deviation for raw and grouped data
 Calculate Standard deviation for raw and grouped data
 Calculate The coefficient of variation for raw and grouped data

CHAPTER 6.PROBABILITY

 Estimate probability
 Explain the types of events
 Describe Conditional probability
 Use tree diagrams to calculate probability

CHAPTER 7. TIME SERIES

 Describe the structure of a time series

 Describe and make calculations the additive model of time series analysis
 forecast future figures using time series

3
 CHAPTER 1: BASIC NUMERICAL CONCEPTS

1.0 Introduction
The skill of being able to handle numbers well is very important in many jobs. There may often
be need to handle numbers and express them clearly in numerical form – and this is part of
effective communication, as well as being essential to understanding and solving many business
problems.

Firstly, though, there is need to examine the basic processes of manipulating numbers
themselves. In this chapter, a review of a number of basic numerical concepts and operations
shall be done. It is essential to ensure that the basics are fully understood before moving on to
some of the more advanced applications in later Chapters.

1.1 Objectives

After studying this unit, students should be able to:

 Identify some different number systems;

 round-up numbers and correct them to significant figures;

 carryout calculations involving the processes of addition, subtraction,

multiplication and division;

 deal with negative numbers;

 cancel fractions down to their simplest terms;

 change improper fractions to mixed numbers or integers, and vice versa;

 add, subtract, multiply and divide fractions and mixed numbers;

 carryout calculations using decimals;

 calculate ratios and percentages, carry out calculations using percentages and divide
a given quantity according to a ratio;

4
  explain the terms index, power, root, reciprocal and factorial.

1.1 The Number System

1.1.1 Denary number system

The number system we use everyday consists of ten figures (i.e. symbols 0 to 9) are used, we call
this number system the “base ten” system or “denary” system. This is illustrated in the
following table.

Table 1: The denary system

Seventh Sixth Fifth Fourth Third Second First
column column column column column column column
Hundreds
Millions of Tens of Thousands Hundreds Tens Units
thousands thousands

The number of columns indicates the actual amounts involved. Consider the number
289.Thismeans that, in this number, there are:
two hundreds (289)
eight tens( 289)
nine units (289)

Before we look at other number systems, we can note that it is possible to have negative numbers
which are less than zero. Numbers which are more than zero are positive. We indicate a negative
number by a minus sign (−). A common example of the use of negative numbers is in the
measurement of temperature – for example, −20°C (i.e. 20°C below zero).
We could indicate a positive number by a plus sign (+), but in practice this is not necessary and
we adopt the convention that, say, 73 means +73.

5
1.1.2 Roman number system
We have seen that position is very important in the number system that we normally use. This is
equally true of the Roman numerical system, but this system uses letters instead of figures.
Although we invariably use the normal denary system for calculations, Roman numerals are still
in occasional use in, for example, the dates on film productions, tabulation, house numbers, etc.
Here are some Roman numbers and their denary equivalent:
XIV 14 XXXV1 36
1X 9 LV111 58

1.1.3 Binary system

As we have said, our numbering system is a “base ten” system. By contrast, computers use “base
two”, or the “binary” system. This uses just two symbols (figures), 0 and 1. In this system,
counting from 0 to 1 uses up all the symbols, so a new column has to be started when counting to
2, and similarly the third column at 4.
Table 2: Binary System

Denary Binary
0 0
1 1
2 10
3 11
4 100
5 101
6 110
7 111
8 1000
9 1001

This system is necessary because computers can only easily recognise two figures – zero or one,
corresponding to components of the computer being either switched off or on. When a number is
transferred to the computer, it is translated into the binary system.

6
1.2 Numbers – Approximation and Integers
Every figure used in a particular number has a meaning. However, on some occasions, precision
is not needed and may even hinder communication. For example, if you are calculating the cost
of the journey, you need only express the distance to the nearest mile.

1.2.1 Rounding off

Suppose you are given the figure 27 836 and asked to quote it to the nearest thousand. Clearly,
the figure lies between 27 000 and 28 000. The halfway point between the two is 27 500. 27 836
is more than this and so, to the nearest thousand, the answer would be 28 000.

There are strict mathematical rules for deciding whether to round up or down to the nearest
figure:

Look at the digit after the one in the last required column. Then:

 for figures of four or less, round down;

 for figures of five or more, round up.

Thus, when rounding off 236 to the nearest hundred, the digit after the one in the last required
column is 3 (the last required column being the hundreds column) and the answer would be to
round down to 200.

When rounding off 3 455 to the nearest ten, the last required column is the tens column and the
digit after that is 5, so we would round up to 3 460.

1.2.2 Significant Figures

By significant figures we mean all figures other than zeros at the beginning or end of a number.

Thus:

632 000 has three significant figures as the zeros are not significant;

0,000632 also has only three significant figures;

630002, however, has six significant figures – the zeros here are significant as they occur in the
middle of the number.

7
We can round off a number to a specified number of significant figures. This is likely to be done
to aid the process of communication – i.e. to make the number language easier to understand and
is particularly important when we consider decimals later in the unit.

Consider the figure 2 017. This has four significant figures. To write it correct to three significant
figures, we need to drop the fourth figure i.e. the 7. We do this by using the rounding off rule –
round down from 4 or round up from 5 – so 2 017 correct to three significant figures becomes
2 020.

To write 2,017 correct to one significant figure, we consider the second significant figure, the
zero, and apply the rule for rounding off, giving 2,000. Do not forget to include the insignificant
zeros, so that the digits keep their correct place values.

1.2.3 Integers

These are simply whole numbers. Thus, 0, 1, 2, 3, 4, etc, are integers, as are all the negative
whole numbers.

The following are not integers:

¾; 1½; 7¼; 0,45; 1.8; 20,25

By adjusting any number to the nearest whole number, we obtain an integer. Thus, a number
which is not an integer can be approximated to become one by rounding off.

Practice Questions

1. Round off the following the figures to the nearest:

i. ten
ii. hundred
iii. one thousand

(a) 3 946

(b) 8 451

(c) 6 501

8
2. Round off the following figures to the nearest:

i. ten thousand
ii. hundred thousand

(a) 6 570 790

(b) 8 480 350

(c) 5 236 000

3. Correct the following to three significant figures:

(a) 2 836

(b) 3 894

(c) 7 886

(d) 9 726

4. How many significant figures are in the following?

(a) 1 736

(b) 22 300

(c) 1 901

(d) 26 000

1.3 Negative Numbers

1.3.1 Addition and Subtraction

We can use a number scale, like the markings on ruler, as a simple picture of addition and
subtraction. Thus, you can visualise the addition of, say, three and four by finding the position of
three on the scale and counting off a further four divisions to the right, as follows:

9
 0 1 2 3 4 5 6 7 8
This brings us to the expected answer of seven.

Similarly we can view subtraction as moving to the left on the scale. Thus, 6 minus 4 is
represented as follows:

0 1 2 3 4 5 6 7 8
This illustrates the sum 6 − 4 = 2.

Negative numbers can also be represented on the number scale. All we do is extend the scale to
the left of zero:

6 5 4 3 2 1 0 1 2 3 4 5 6

We can now visualise the addition and subtraction of negative numbers in the same way as
above.

Consider the sum (−3) + 4. Start at −3 on the scale and count four divisions to the right:

4 3 2 1 0 1 2 3 4

10
Therefore, (−3) + 4 = 1.

(Note that, here, we have shown the figure of “minus 3” in brackets to avoid confusion with an
addition and subtraction signs.)

The order of the figures of these calculations does not matter, so we can also write:

(−3) + 4 = 4 + (−3) = 1

We can illustrate the second sum as follows:

3 2 1 0 1 2 3 4 5
This is the same as 4 − 3. In effect, therefore, a plus and a minus together make a minus.

With subtraction, the process is slightly different. To subtract a minus number, we change the

subtraction sign to a plus and treat the number as positive. For example:

4 − (−3) = 4 + 3 = 7

Consider the follow examples. (Draw your own number scales to help visualise the sums if you
find it helpful.)

7 − (−3) = 7 + 3 = 10

2 + (−6) = 2 − 6 = −4

Table 3: Multiplying and dividing using negative numbers

11
Solve the following sums, using a number scale if necessary:

1. 7 + (−4) 2. (−4) + 7

3. 8 − (−6) 4. 6 + (−8)

5. (−9) + 3 6. (−8) − (−2)

7. (−5) + (−4) 8. (−3) × (−5)

9. (−7) ÷ (−7) 10. 10 × (−10)

1.4 DECIMALS

Decimals are an alternative way of expressing a particular part of a whole. The term “decimal”
means “in relation to ten”, and decimals are effectively fractions expressed in tenths, hundredths,
thousandths, etc.

Unlike fractions, though, decimals are written completely differently and this makes carrying out
arithmetic operations on them much easier.

Decimals do not have a numerator or a denominator. Rather, the part of the whole is shown by a
number following a decimal point:

 the first number following the decimal point represents the number of tenths, so 0.1 is
one tenth part of a whole and 0.3 is three tenths of a whole;

12
  the next number to the right, if there is one, represents the number of hundredths, so 0.02
is two hundredths of a whole and 0.67 is six tenths and seven hundredths (i.e. 67
hundredths) of a whole;
 the next number to the right, again if there is one, represents the number of thousandths,
so 0,005 is five thousandths of a whole and 0.134 is 134 thousandths of a whole; and so
on up to as many figures as are necessary.

We can see the relationship between decimals and fractions as follows:

1 3 67 1
0 , 1= 0 , 3= 0 , 67= 0,001=
10 10 100 1000

45 6 382 81
0,045= 0,6 = 0,382= 3,81 = 3
1000 10 1000 100

We can see that any fraction with a denominator of ten, one hundred, one thousand, ten
thousand, etc. can be easily converted into a decimal. However, fractions with a different
denominator are also relatively easy to convert by simple division.

1.4.1 Arithmetic with Decimals

Performing addition, subtraction, multiplication and division with decimals is exactly the same
as carrying out those same operations on whole numbers. The one key point to bear in mind is to
get the position of the decimal point in the right place. Layout is all important in achieving this.

(a) Adding and subtracting

To add or subtract decimals, arrange the numbers in columns with the decimal points all being in
the same vertical line. Then you can carry out the arithmetic in the same way as for whole
numbers.

For example, add the following: 3,6 + 7,84 + 9,172

The layout for this is as follows:

3,6
7,84
+ 9,172

13
Total 20,612
Similarly, subtraction is easy provided that you follow the same rule of ensuring that the decimal
points are aligned vertically. For example, subtract 18.857 from 63.7:
63,7
- 18,857
Total 44,843

(b) Multiplying decimals

It is easier to use a calculator to multiply decimals, although you should ensure that you take care
to get the decimal point in the correct place when both inputting the figures and when reading the
answer. The principles of multiplying decimals manually are the same as those considered earlier
in the unit for whole numbers.

However, it is important to get the decimal point in the right place. There is a simple rule for
this; the answer should have the same number of decimal places as there were in the question.

Consider the sum 40 × 0.5. The simplest way of carrying this out is to ignore the decimal points
in the first instance, multiply the sum out as if the figures were whole numbers and then put back
the decimal point in the answer. The trick is to put the decimal point back in the right place.

So, ignoring the decimal points, we can multiply the numbers as follows:

40 × 5 = 200

Now we need to put the decimal point into the answer. To get it in the right place, we count the
number of figures after a decimal point in the original sum; there is just one, in the multiplier

(0,5) and place the decimal point that number of places from the right in the answer:

20,0 or just 20

If the sum had been 0.4 × 0.5, what would the answer be? The multiplication would be the same,
but this time there are 2 figures after decimal points in the original sum. So, we insert the
decimal point two places to the right in the answer: 0.2

14
One final point to note about multiplying decimals is that, to multiply a decimal by ten, you
simply move the decimal point one place to the right. For example:

3,62 × 10 = 36,2

Likewise, to multiply by 100, you move the decimal point two places to the right:

3,62 × 100 = 362

This can be a very useful technique, enabling quick manual calculations to be done with ease.

(c) Division with decimals

Again, it is far easier to use a calculator when dividing with decimals.

However, when dividing by ten or by one hundred (or even by a thousand or a million), we can
use the technique noted above in respect of multiplication to find the answer quickly without
using a calculator:

to divide by ten, simply move the decimal point one place to the left – for example,

68,32 ÷ 10 = 6,832

to divide by one hundred, simply move the decimal point two places to the left – for example,

8,32 ÷ 100 = 0,6832.

(d) Converting fractions to decimals, and vice versa

Fractions other than tenths, hundredths, thousandths, etc. can also be converted into decimals.

It is simply a process of dividing the numerator by the denominator and expressing the answer in
decimal form. You can do this manually, but in most instances it is easier to use a calculator.

For example, to change

3
into decimal form, you divide 3 by 5 (i.e. 3 ÷ 5).
5

15
Using a calculator the answer is easily found: 0.6

However, not all fractions will convert so easily into decimals in this way.

1
Consider the fraction
3

Dividing this out (or using a calculator) gives the answer 0.3333333, or however many 3s for
which there is room on the paper or the calculator screen. This type of decimal, where one or
more numbers repeat infinitely, is known as a recurring decimal.

In most business applications, we do not need such a degree of precision, so we abbreviate the
decimal to a certain size – as we shall discuss in the next section. To change a decimal into a
fraction, we simply place the decimal over ten or one hundred, etc, depending upon the size of
the decimal. Thus, the decimal becomes the numerator and the denominator is 10 or 100, etc. For
example:

36 9
0.36 = =
100 25

1.4.2 Limiting the number of decimal places

We noted above that certain fractions do not convert into exact decimals. The most common
examples are one third and two thirds, which convert into 0,3333333, etc. and 0.6666666, etc,
respectively. (When referring to these types of recurring decimals, we would normally just quote
the decimal as, say, “0,3 recurring”.) However, there are also plenty of other fractions which do
convert into exact decimals, but only at the level of thousandths or greater. For example:

2
= 0,2857142, or
7

11
= 0,6470568
17

16
This gives us a problem: how much detail do we want to know? It is very rare that, in business
applications, we would want to know an answer precise to the millionth part of a whole, although
in engineering, that level of precision may be critical.

Such large decimals also present problems in carrying out arithmetic procedures – for example, it
is not easy to add the above two decimals together and multiplying them does not bear thinking
about.

In most business circumstances, then, we limit the number of decimal places to a manageable
number. This is usually set at two or three decimal places, so we are only interested in the level
of detail down to hundredths or thousandths. We then speak of a number or an answer as being
“correct to two (or three) decimal places”.

For decimals with a larger number of decimal places than the required number, we use the
principles of rounding discussed earlier in the unit to reduce them to the correct size. Thus, we
look at the digit in the decimal after the one in the last required place and then:

 for figures of five or more, round up the figure in the last required place;
 for figures of four or less, round down by leaving the figure in the last required place
unchanged.

So, if we want to express the decimal form of two sevenths (0.2857142) correct to three decimal
places, we look at the digit in the fourth decimal place: 7. Following the rule for rounding, we
would then round up the number in the third decimal place to give us 0.286.

Now consider the decimal forms of one third and two thirds. If we were to express these correct
to two decimal places, these would be 0.33 and 0.67 respectively.

Working to only two or three decimal places greatly simplifies decimals, but you should note
that the level of accuracy suffers. For example, multiplying 0,33 by two gives us 0.66, but we
have shown two thirds as being 0,67. These types of small error can increase when adding,
subtracting, multiplying or dividing several decimals which have been rounded – something
which we shall see later in the course in respect of a set of figures which should add up to 100,
but do not. In such cases, we need to draw attention to the problem by stating that “errors are due
to rounding”.

17
Practice Questions

1. Carry out the following calculations:

(a) 3.67 + 4.81 + 3.2 (b) 8.36 + 4.79 + 6.32

(c) 7.07 + 8.08 + 11.263 (d) 11.14 + 8.16 + 3.792

(e) 8.84 − 3.42 (f) 7.36 − 2.182

(g) 10.8 − 4.209 (h) 12.6 − 3.43

(i) 3.62 × 2.8 (j) 4.8 × 3.3

(k) 5.8 × 4.1 (l) 0.63 × 5.2

(m) 154 ÷ 2.2 (n) 2.72 ÷ 1.7

(o) 11.592 ÷ 2.07 (p) 2.6 ÷ 0.052

2. Change the following fractions into decimal form, correct to the number of decimal places

specified:

2 3
(a) to 2 d.p (d) to 3 d.p
5 8
3 7
(b) to 2 d.p (e) to 3 d.p
4 8

5 5
(c) to 3 dp (f) to 3 dp
8 6

3. Change the following decimals into fractions and reduce them to their lowest possible terms

(a) 0,125 (c) 0,60

(b) 1,75 (d) 0,750

18
1.5 Percentages
A percentage is a means of expressing fractions in parts of a hundred – the words “per cent”
simply mean “per hundred”, so when we say “percentage”, we mean “out of a hundred”. The
expression “20 per cent” means 20 out of 100. The per cent sign is %, so 20 per cent is written as
20%.

4
 4% means four hundredths of a whole, or four parts of a hundred =
100
 28% means twenty-eight hundredths of a whole, or twenty-eight parts of a hundred =
28
100
100
 100% means one hundred hundredths of a whole, or a hundred parts of a hundred =
100

Percentages are used extensively in many aspects of business since they are generally more
convenient and straightforward to use than fractions and decimals. It is important, therefore, that
you are fully conversant with working with them.

1.5.1 Arithmetic with Percentages

Multiplication and division have no meaning when applied to percentages, so we need only be
concerned with their addition and subtraction. These are quite straightforward, but you need to
remember that we can only add or subtract percentages if they are parts of the same whole.

Take an example: If Peter spends 40% of his income on rent and 25% on household expenses,
what percentage of his income remains? Here both percentages are parts of the same whole –
Peter’s income – so we can calculate the percentage remaining as follows:

100% − (40% + 25%) = 35%

However, consider this example. If Alan eats 20% of his cake and 10% of his pie, what
percentage remains? Here the two percentages are not parts of the same whole – one refers to
cake and the other to pie. Therefore, it is not possible to add the two together.

19
1.5.2 Percentages and Fractions

Since a percentage is a part of one hundred, to change a percentage to a fraction you simply
divide it by 100. In effect all this means is that you place the percentage over 100 and then
reduce it to its lowest possible terms.

For example:

60 3
60% = =
100 5

24 6
24% = =
100 25

Changing a fraction into a percentage is the reverse of this process – simply multiply by 100. For

example:

3
× 100 =37½% or 37,5%
8

2
× 100 = 66,67%
3

1.5.3 Percentages and Decimals

To change a percentage to a decimal, again you divide it by 100. As we saw in the last section,
this is easy – you simply move the decimal point two places to the left. Thus:

11,5% = 0,115

Working the conversion the other way is equally easy. To change a decimal to a percentage,
move the decimal point two places to the right:

0,36% = 36%

1.5.4 Calculating Percentages

20
To find a particular percentage of a given number, change the percentage rate into a fraction or a
decimal and then multiply the given number by that fraction/decimal.

For example, to find 15% of £260:

15
£260 × = £39 or £260 × 0,15 = £39
100

To express one number as a percentage of another, we convert the numbers into a fraction with
the first number as the numerator and the second the denominator, and then change the fraction
into a percentage by multiplying by 100.

For example, what percentage of cars has been sold if 27 have gone from a total stock of 300?

27
× 100 = 9%
300

Do not forget that percentages refer to parts of the same whole and, therefore, can only be only
be calculated where the units of measurement of the quantities concerned are the same.

For example, to show 23 pence as a percentage of £2, we need to express both quantities in the
same units before working out the percentage. This could be both as pence or both as pounds:

23 0 ,23
× 100 = 11.5% or × 100 = 11.5%
200 2

There are occasions when we deal with percentages greater than 100%. For example, if a man
sells a car for £1,200 and says that he made 20% profit, how much did he buy it for?

The cost plus the profit = 120% of cost = £1,200

120
The cost, therefore, is 100% To work out the cost, we need to multiply the selling price by :
100

120
Cost = 1,200 × = £1,000
100

To prove that this is correct, we work the calculation through the other way. The cost was £1,000
and he sold it at 20% profit, so the selling price is:

21
£1,000 + 20% of £1,000 = £(1,000 + 0.2 × 1,000) = £1,200, as given above.

Practice Questions

1. Change the following fractions into percentages:

3
(a)
100

3
(b)
8

2. Change the following percentages into fractions and reduce them to their lowest possible
terms

(a) 2% (b) 8%

(c) 7½% (d) 18%

3. Calculate the following:

(a) 15% of £200 (b) 25% of 360°

(c) 12½% of 280 bottles (d) 27% of £1,790

(e) 17.5% of £138

4. Calculate the following:

(a) 60 as a percentage of 300 (b) 25 as a percentage of 75

(c) £25 as a percentage of £1,000 (d) 30 as a percentage of 20

1.6 Ratios
A ratio is a way of expressing the relationship between two quantities. It is essential that the two
quantities are of expressed in the same units of measurement – for example, pence, number of
people, etc. – or the comparison will not be valid.

22
For example, if we wanted to give the ratio of the width of a table to its depth where the width is
2 m and the depth is 87 cm, we would have to convert the two quantities to the same units before
giving the ratio. Expressing both in centimetres would give the ratio of 200 to 87 (200:87).

Note that the ratio itself is not in any particular unit – it just shows the relationship between
quantities of the same unit.

We use a special symbol (the colon symbol : ) in expressing ratios, so the correct form of
showing the above ratio would be:

200 : 87 (pronounced “200 to 87”)

There are two general rules in respect of ratios.

 They should always be reduced to their lowest possible terms (as with vulgar fractions).
To do this, express the ratio as a fraction by putting first figure over the second and
cancel the resulting fraction. Then re-express the ratio in the form of numerator :
denominator. For example, consider the ratio of girls to boys in a group of 85 girls and 17
boys. The ratio would be 85:17. This can be reduced as follows:

The ratio of 85 to 17 is, therefore, 5 : 1.

 Ratios should always be expressed in whole numbers. There should not be any fractions
or decimals in them. Consider the ratio of average miles per gallon for cars with petrol
engines to that for cars with diesel engines where the respective figures are 33½ mpg and
47 mpg. We would not express this as 33½ : 47, but convert the figures to whole numbers
by, here, multiplying by 2 to give: 67 : 94

Ratios are used extensively in business to provide information about the way in which one
element relates to another. For example, a common way of analysing business performance is to
compare profits with sales. If we look at the ratio of profits to sales across two years, we may be
able to see if this aspect of business performance is improving , staying the same or deteriorating.
(This will be examined elsewhere in you studies.)

23
Another application is to work out quantities according to a particular ratio. For example, ratios
are often used to express the relationship between partners in a partnership – sharing profits on a
basis of, say, 50 : 50 or 80 : 20.

Consider the case of three partners – Ansell, Boddington and Devenish – who share the profits of
their partnership in the ratio of 3 : 1 : 5. If the profit for a year is £18,000, how much does each
partner receive?

To divide a quantity according to a given ratio:

 first add the terms of the ratio to find the total number of parts;
 then find what fraction each term of the ratio is to the whole; and
 finally divide the total quantity into parts according to the fractions.

For the Ansell, Boddington and Devenish partnership, this would be calculated as follows:

The profit is divided into 3 + 1 + 5 = 9 parts.

3
Therefore: Ansell receives of the profits;
9

1
Boddington receives of the profits; and
9

5
Devenish receives of the profits.
9

Therefore:

Ansell gets

3 1
× £18,000 = £6,000 Boddington gets × £18,000 = £2,000
9 9

5
Devenish gets × £18,000 = £10,000
9

Practice Questions

1. Express the following sales and profits figures as profit to sales ratios for each firm:

24
Firm Sales Profits

£ £

A 100 000 25 000

B 63 000 7 000

C 30 000 10 000

D 75 000 15 000

2. Calculate the distribution of profits for the following partnerships:

(a) X, Y and Z share profits in the ratio of 3 : 4: 5. Total profit is £60 000

(b) F, G and H share profits in the ratio of 2 : 3 : 3. Total profit is £7 200

CHAPTER 2: ALGEBRA, EQUATIONS AND FORMULAE

2.0 Introduction
In this chapter the main focus will be a review of basic concepts by looking at algebra. Algebra
essentially involves the substitution of letters for numbers in calculations, so that rules and
procedures for carrying out mathematical operations which can be applied whatever the actual
numbers involved can be established. In this sense, then, algebra enables general expressions to
be developed and general results to be obtained.

Equations are also going to be introduced. An equation is simply a statement of equality between
two mathematical expressions, and is generally used to enable one or more unknown quantities
to be worked out. There are various rules and procedures which can be applied to equations to
help this process and these will be examined in full.

Finally, a brief look at formulae will be done. A formula is one particular form of generalised
mathematical statement, usually expressed in the form of an equation, which sets out a rule
which may be applied in particular situations. There are formulae which describe a great many
physical situations or mathematical problems.

2.1Objectives
When students have completed this chapter they will be able to:
25
  outline the basic principles of algebra;
 apply the basic arithmetic operations of addition, subtraction, multiplication and division
to algebraic notation, and simplify algebraic expressions by the process of collecting like
terms;
 define equations and formulae and outline their uses;
 find unknown quantities and values from simple equations by using transposition;
 outline the principles of formulae and how they are constructed;
 rearrange the terms in a formula to isolate different unknowns.

2.2 Definitions
2.2.1 Algebra

Algebra is a branch of mathematics in which, instead of using numbers, we use letters to

represent numbers.

We all know that 2 + 3 = 5.

Suppose, though, that we substitute letters for the first two numbers, so that:

2=a

3=b

We can then write:

a+b=5

All that has happened is that we have replaced the numbers with letters. However, a number is a
specific quantity – for example, 5 is more than 4, but less than 6 – whereas a letter can be used to
represent any number. Thus, in the above expression, “a” could be 4 and “b” could be 1. We only
know that they are 2 and 3 respectively because we defined them as such before. The main
consequence of this is that algebra uses general expressions and gives general results, whereas

26
arithmetic (using numbers) uses definite numbers and gives definite results. Arithmetic is
specific, whereas algebra is general.

Let us consider some examples to illustrate this further.

 Suppose you have a piece of wood which is 7 metres long and from it you wish to cut a
piece 4 metres long. The length of the remaining piece is 3 m, calculated as follows:

7−4=3

This is a specific arithmetic statement relating to cutting a specific amount from this particular
piece of wood.

We could translate this into an algebraic expression by substituting letters for the specific
lengths:

let the original length of the piece of wood = x metres

the length of the piece cut off = y metres

The calculation can now be shown as:

x−y=3

This is now a general statement for cutting one length of wood from another to leave a piece 3
metres in length.

 To find the area of a floor measuring 10 m long and 9 m wide, we multiply one
dimension by the other:

Area = 10 × 9 square metres = 90 sq m

Substituting the letters “l” and “w” to represent the actual length and width, we can reformulate
the expression as:

Area = l × w

27
Again, this is a general expression which can be made specific by putting in particular values for
“l” and “w”.

The distance travelled by a train in 3 hours at a speed of 60 miles per hour is easily calculated as:

3 × 30 = 180 miles

Here again, letters may be substituted to give us a general expression:

s×t=d

where: speed = s mph time = t hours distance travelled = d miles

Thus, using algebra – working with letters instead of numbers – allows us to construct general
mathematical expressions. This is not particularly helpful in itself, but is very important when we
come to consider equations.

2.3 Algebraic Equations

An equation is simply a mathematical statement that one expression is equal to another. So, for
example, the statement that “2 + 2 = 4” is an equation.

Note that an equation has two sides. Here, they are “2 + 2” and “4”. The two sides must always
be in equality for the statement to be an equation.

If we now introduce the concept of algebra into this, we have the makings of an extremely useful
mathematical tool.

For example, given that a certain number multiplied by 3 is 6, we can write this as:

3 × the required number = 6.

To save writing “the required number” (or the “ unknown” number), it is more convenient to call
it

“x”, so that we can then write:

3×x=6

Here are a few simple statements which you can easily write as equations for practice:

28
(a) a certain number is added to 4 and the result is 20.

(b) a certain number is multiplied by 4 and the result is 20.

(c) if 4 is taken from a certain number the result is 5.

(d) if a certain number is divided by 3 the result is 1.

The correct equations are:

(a) x + 4 = 20 (b) x × 4 = 20

(c) x − 4 = 5 (d) x ÷ 3 = 1

The point of constructing equations in this way is that provide a means by which you can work
out the unknown value (here, “x”). These examples are very simple and you can probably solve
them (i.e. work out the unknown) very easily. However, equations can get very complicated.
Don’t worry, though – there are a number of simple rules which can be used to help solve them.

As algebraic letters simply represent numbers, the operations of addition, subtraction,

multiplication and division are still applicable in the same way. However, in algebra it is not
always necessary to write the multiplication sign. So, instead of “a × b”, we would write simply
“ab” (or sometimes “a.b”, using the full stop to represent multiplication).

2.4 Solving Linear Equations

When we talk about solving an equation, we mean finding the value of the unknown or
unknowns using the other numbers in the equation. For example, in: 4x = 20 the value of the
unknown (x) can be discovered because of the stated relationship between 4 and 20. You will
easily conclude that if 4 times the unknown = 20 then the unknown must be 5.

There are a number of rules which can be used to help solve equations and we shall consider
these below in relation to equations which have only one unknown. In a later unit we shall
examine more complex equations – those with two or more unknowns – and consider additional
rules. However, these are based on the simple rules which we set out here.

2.4.1 Equality of Treatment to Both Sides of the Equation

29
This is the golden rule that you must always follow when handling equations and there are no
exceptions.

What you do to one side of the equation, you must also do to the other.

Remember that an equation has two sides and those two sides must always be in equality for the
whole statement to be an equation. So, anything we do to the equation must maintain this
equality. Another way of thinking about this is that an equation is like a balance. If the weights
of a balance are equal on both sides it is “in balance”. You can add an equal weight to each side,
or take an equal weight from each side, and it will remain “in balance”. Looking at the rule in
more detail, we can see a number of possible operations which may be carried out without
changing the equality of the equation.

(a) The same number may be added to both sides of the equation

For example:

x − 4 = 6 If we add 4 to each side, then we get: x − 4 + 4 = 6 + 4

x = 10

(b) The same number may be subtracted from both sides of the equation

For example:

x + 6 = 18 If we deduct 6 from each side, we get:

x + 6 − 6 = 18 − 6

x = 12

(c) Both sides of the equation may be multiplied by the same number.

For example:

1 1 x
of a number = 10, or x = 10, or = 10
3 3 3

If we multiply both sides by 3, we get:

30
x
× 3 = 10 × 3 3x = 30 x = 30
3

(d) Both sides of the equation may be divided by the same number.

For example:

2 times a number is 30, or 2x = 30

2 x 30
If we divide both sides by 2, we get: =
2 2

x = 15

You should have noticed that the object of such operations is to isolate a single unknown, x, on
one side of the equals sign.

Practice Questions

Simplify the following expressions, writing “no simpler form” if you think any cannot be further
simplified:

1. x − 7 = 21 2. x − 3 = 26

x
3. x + 9 = 21 4. = 11
5

x
5. =7 6. 3x = 30
8

2.4.2 Transposition

When you understand the rules in the previous subsection you may shorten your working by
using transposition instead. Transposition is a process of transferring a quantity from one side of
an equation to another by changing its sign of operation.

This is done so as to isolate an unknown quantity on one side.

You must observe the following rules:

An added or subtracted term may be transposed from one side of an equation to the other

31
if its sign is changed from + to −, or from − to +

Consider the following examples:

(a) x − 4 = 6

Transfer the 4 to the right-hand side of the equation and reverse its sign:

x=6+4

x = 10

(b) x + 6 = 18

Transfer the 6 to the right-hand side and reverse its sign:

x = 18 – 6 x = 12

Note that we can keep transposing terms from one side to the other until we have isolated the

unknown quantity.

 A multiplier may be transposed from one side of an equation by changing it to the

divisor on the other
 Similarly, a divisor may be transposed from one side of an equation by changing it
to the multiplier on the other

Consider the following examples:

x
(a) = 12
4

To get x by itself, move 4 across the = sign and change it from divisor to multiplier, i.e.:

x = 12 × 4 x = 48

(b) 2x = 20

To get x by itself, transpose the 2 and change it from multiplier to divisor, i.e.:

32
 20
x= x = 10
2

24
(c) =6
x

In this case, we need to transpose x and change it from divisor to multiplier, i.e.:

24 = 6x

Then, to get x by itself, we transpose the multiplier (6) and change it to a divisor:

24
=x
6

x=4

This rule is called cross multiplication.

Practice Questions

Find the value of x by transposition:

x 72
1. = 36 2. = 24
6 x

3. 3x + 3 = 21 4. 5x = 25

5. 2x − 3 = 15 6. 21 − x = 15

2.4.3 Equations with the Unknown Quantity on Both Sides

These equations are treated in the same way as the other equations we have met so far. We
simply keep transposing terms as necessary until we have collected all the unknown terms on
one side of the equation.

For example, consider 3x − 6 = x + 8

First move the −6 to the right-hand side, making it +6:

33
3x = x + 8 + 6

Then transpose x from right to left, changing its sign:

3x − x = 8 + 6 2x = 14

Finally, move the 2 to the right-hand side changing it from multiplier to divisor, and thus
2 x 14
isolating x on the left: =
2 2

x=7

Practice Questions

Find the value of x:

1
1. x + 3 = 8 − 2x 2. 2x = 24 – x 3. = 15 − x
2x

2
4. 5x − 3 = 27 + 2x 5. 18 + x = 5x – 2 6. = 24 + 6x
3x

2.5 Formulae
A formula is a mathematical model of a real situation.

The easiest way to explain this is to give an example.

2.5.1 Formulating a Problem

When person borrows money, he/she has to pay interest on the loan (called the “principal”). The
amount of interest payable is determined by the annual rate of interest charged on the money
borrowed, taking into account the time over which the loan is repaid. If we want to work out the
amount of interest repayable on a particular loan, the calculation is as follows:

Interest = the principal multiplied by the percentage rate of interest, multiplied by the number of
time periods the interest is to apply. We could model this situation by using algebraic notation
and then show the whole calculation as an equation:

34
 let: I = simple interest

P = principal

r = rate of interest (%)

n = number of periods

r
then: I = P × ×n
100

This equation is the formula for calculating simple interest. It can be used for any simple interest
calculation and enables us to find the value of any one of the elements, provided that we know
all the others.

Thus, what we have done is express the real situation as a mathematical model using an algebraic
equation.

This particular formula is very important in financial studies and can be applied in many
situations.

However, it is possible to develop formulae to model any situation involving mathematical

relationships. Some are just useful for helping to understand how to work out a particular
problem or situation you are faced with, whilst others describe key mathematical relationships
which you will meet time and again throughout the course.

For example, consider the following situation:

A man runs at a certain number of km per hour for a certain number of hours, and then cycles at
a certain number of km per hour for a certain number of hours. What is his average speed?

let: x = the speed at which he runs (in kph)

y = the number of hour he runs

p = the speed at which he cycles (in kph)

q = the number of hour he cycles

35
Therefore, we can say he covers (xy + pq) kilometres in (y + q) hours.

then: Average speed =

xy+ pq
km per hour.
x+ y

Note that when we use a letter such as x to represent an unknown quantity, it only represents that
quantity and the units must be exactly specified. For example, we said “let x = the speed at which
he cycles (in kph)” – to have said “let x = the speed at which he cycles” would have been
inaccurate.

The steps to take in formulating the problem, then, are as follows:

 select a letter to represent each of the quantities required;

 convert each block of information from the problem into an algebraic term or statement,
using the letters selected;
 form an equation by combining the symbolic terms, ensuring that all terms are expressed
in the same units.

The last step is to test the formula by going back to the problem and check that it works by using
real number values in the formula through the process of substitution. We shall look at
substitution below.

As practice, see if you can work the following problem out by developing a formula. Note that
the unknown quantities have already been given letters.

A grocer mixes m kg of tea at x pence per kg with n kg of tea at y pence per kg. If he sells the
mixture at v pence per kg, what profit, in pence, does he make? Bring your answer to £s.

The solution would be as follows:

Profit = Selling price − Cost price

Selling price = Quantity sold × Price

v(m + n) pence

36
 Cost price = (mx + ny) pence

Profit = v(m + n) − (mx + ny) pence

To convert this to £s, we simply divide the result by 100:

v ( m+ n )−(mx+ ny)
Profit = £
100

2.5.2 Constants and Variables

As we have seen above, formulae consist of letters (algebraic notation) and, sometimes,
numbers. These are combined together in particular ways to express the mathematical
relationships between the terms such that a particular result is obtained.

The numbers in a formula always stay the same and are known as constants. so, for example, in
the formula for simple interest, the constant will always be 100, no matter what the values given
to the P, r and n in a particular situation.

The letters are, on the other hand variables. The value that they have in working out the formula
in any particular situation may vary – it depends on the particular circumstances of the problem.

2.5.3 Substitution

We defined a formula as a mathematical model of a real situation. In order to use that model in a
real situation, we have to give the variables the values which apply in that particular situation.
Doing this is the process of substitution.

Turning back to the formula for simple interest, consider the following example: What is the
simple interest on £1,000 invested at 10% per annum (i.e. per year) for two years? First of all we
should restate the formula:

r
I=P× ×n
100

Now we substitute the values from the problem into the formula:

P = £1 000 r = 10 n=2

37
 10
So: I = 1 000 × ×2
100

£1,000 × 10 × 20

£200

This explains the principle of substitution.

2.5.4 Rearranging Formulae

Finally, we should note that a formula can be rearranged to find a different unknown quantity.
So, for example, when considering simple interest, we may wish to know how long it would take
to earn a specified amount of interest from a loan made to someone else, at a particular rate of
interest.

The way in which the formula is expressed at present does not allow us to do that, but by using
the rules we discussed above in relation to simple equations, we can rearrange the formula so
that it does.

Again, we start by restating the original formula:

Note that we can also express this as:

Prn
I=
100

To find n, we need to rearrange the formula so that n is isolated on one side of the equation.

We can do this by multiplying both sides by 100 and then dividing both sides by Pr

Prn
100 × I = ×100 100I = Pr n
100

100 I Prn 100 I

= n=
Pr Pr Pr

Practice Questions

38
Rearrange the simple interest formula to allow the following calculations to be made:

1. To find P – the principal which would provide a certain amount of interest at a particular
rate of interest over a specified period.
2. To find r – the rate of interest which would have to be charged to earn a particular
amount of interest on a specified principal over a certain period of time.

2.6 Quadratic Equations

All the equations we have studied so far have been of a form where all the variables are to the
power of 1 and there is no term where x and y are multiplied together – i.e. xy does not feature in
the equation. (These types of equation are known as linear equations since, if we draw a graph of
the outcome of the equation for all the possible values of the unknowns, the result is a straight
line.)

By contrast, a quadratic equation is one that contains the square of the unknown number, but no
higher power. For example, the following are quadratic expressions in x:

4x2 + 7x

2x2 − x + 1

1 2
x − 2.
2

We can also have quadratic expressions in x 2. For example, 3x4 + 2x2 + 5 is a quadratic in x 2,
since it may be also be written as:

3(x2)2 + 2(x2) + 5, or

3y2 + 2y + 5, where y stands for x2.

Note that these are examples of quadratic expressions. A quadratic equation is obtained by
making such an expression equal to a similar expression or to a number.

One of the features of quadratic equations is that, usually, they cannot be solved definitively.
There are generally two possible values for the unknown.

39
A second feature, reflecting this, is that when we draw a graph of the outcome of a quadratic
equation for all the possible values of the unknown, the result is a curve.

2.6.1 Solving a Quadratic Equation by Factorisation

If an equation contains two unknown numbers, we cannot determine their values unless we are
told something more. For example, if x and y are two quantities and all we are told about them is
that their product is 12, we cannot tell either of their values x may be 3, in which case y must be
4; or x may be −½, in which case y must be −24, etc. This is true whatever the value of the
product, with the one exception that if xy = 0, then either x = 0 or y = 0.

If x = 0, y may have any value, and if y = 0, x may have any value. They need not both be 0, but
one of them must be, since the product of two numbers is zero only when one of them is itself
zero.

This important fact provides the easiest method of solving a quadratic equation, as is shown in
the following examples.

Example 1

Consider the following equation:

x(x − 3) = 0

Here, the product of the two factors x and (x − 3) is zero. Therefore, one of the factors must be
zero:

either: x = 0 or: (x − 3) = 0

Further, if (x − 3) = 0, then x = 3

40
Thus, the equation is satisfied if x = 0, or if x = 3.

Having understood the principle of this procedure, we do not need to give it in full every time.
The following example simplifies the steps.

Example 2

Consider the following equation:

x(x − 5) = 0 Either, x = 0, or (x − 5) = 0 therefore x = 0, or x = 5

The important thing to remember is that this applies only to a product the value of which is zero.

Therefore, the above method of solving an equation applies only when the RHS (right-hand
side) of the equation is zero, while the LHS can be expressed in factors.

Example 3

Consider the following equation:

(x − 5)(x − 2) = 4

We must rearrange this so that the RHS is zero. First of all, we have to expand the product of the

factors:

x2 − 7x + 10 = 4

Then we rearrange the equation so that the RHS is zero:

x2 − 7x + 6 = 0

Now we have to re-express the LHS in factors:

(x − 6)(x − 1) = 0

Now we can say that either (x − 6) = 0, or (x − 1) = 0.

x = 6, or x = 1

Check this in the original equation just to justify to ourselves that the method works:

41
(x − 5)(x − 2) = 4

If x = 6:

(6 − 5)(6 − 2) = 1 × 4 = 4

If x = 1:

(1 − 5)(1 − 2) = (−4)(−1) = +4

Practice Questions

Solve the following equations:

1. x(x − 1) = 0 2. (x − 1)(x + 2) = 0

3. 3x(x + 1) = 0 4. 4x2 = 0

5. (2x − 1)(x + 3) = 0 6. (3x − 2)(2x + 3) = 0

One of the reasons that the questions above were so easy is that the LHS of the equations were
already expressed in factor terms. Commonly, though, equations are not so simple – the factors
may not already have been found, or the terms are not already collected on one side of the
operation.

You will, therefore, have to work as follows:

 Collect all the terms on the LHS, so that the RHS is zero.
 Factorise the LHS expression – the product of the factors is then zero.
 Equate each factor in turn to zero, where possible.
 Finally, give your answers as alternative values for x.

Work through the following two examples carefully to make sure that you understand the
process thoroughly.

Example 4

42
Consider the following equation:

7x2 + 23x = 60

First, collect all the terms on the LHS, so that the RHS is zero

7x2 + 23x − 60 = 0

Then factorise the LHS expression:

(7x − 12)(x + 5) = 0

Then equate each factor in turn to zero: either (7x − 12) = 0, or (x + 5) = 0

which may be expressed as: 7x = 12, or x = −5

Finally, give your answers as alternative values for x:

5
x=1 or −5
7

Practice Questions

Solve the following equations:

1. 7 − x2 = 5 – x 2. x2 + 4x + 4 = 0

3. x2 − 10x = 24 4. x(x − 2) = 2(2 − x)

5. x2 − 11x + 30 = 0 6. 2x2 + 5 = 11x

7. 10x2 + 11x + 3 = 0 8. (x + 3)(x − 3) = 8x

9. (x − 1)2 + (x + 1)2 = 34 10. (x + 1)2 − (x − 1)2 = x2

11. 9x2 = 25 12. 12x2 + 12x = 9

2.6.2 Solving Quadratic Equations by Formula

Since the method used above for solving a quadratic equation applies to all cases, even where no
real roots can be found, it can be used to establish a formula.

43
Consider the equation ax2 + bx + c = 0, where a, b and c may have any numerical value.
Rearranging the equation we get:

−b ± √ b 2−4 ac
x=
2a

This is an important formula. When using it, always write it down first, then write the values of
a, b, c in the particular case, paying great attention to the signs. It can be used to solve any
quadratic equation, although you should, use the factor method whenever possible.

Example 1

Consider the following equation:

5x2 − 15x + 11 = 0

−b ± √ b 2−4 ac
x=
2a

where: a = 5, b = −15, c = 11

Therefore:

−(−15)± √(−15) −4 × 5 ×11

2
+15 ± √ 225−220
x= x=
2 ×5 10

15± 2,236
x= x = 1,72 or 1,28 to two decimal places
10

Example 2

Consider the following equation:

3x2 + 4x − 5 = 0

−b ± √ b 2−4 ac
x=
2a

where: a = 3, b = 4, c = −5

44
Therefore:

−4 ± √(4)2−4 ×3 ×−5 −4 ± √ 16−(−60)

x= x=
2× 3 6

−4 ± 8,718
x= = 0,79 or −2,12 (to two decimal places)
6

Practice Questions

Solve the following by means of the formula:

1. 2x2 + 13x + 4 = 0

2. 5x2 − 3x − 4 = 0

3. x2 − 5x + 2 = 0

4. 4x2 + 7x + 1 = 0

5. x2 − x − 1 = 0

2.7 Simultaneous Equations

From the previous points when solving equations, we had only one unknown quantity to find.
However, in the practical world, many situations will arise when there is more than one
unknown. If an equation involves two unknown quantities, we may find any number of pairs of
values to satisfy it.

Consider the following example:

x+y=7

This may be satisfied by:

x = 3 and y = 4

x = 2½ and y = 4½

x = −1.3 and y = +8.3, etc.

45
To determine a particular pair of unknown values, then, we need more information. One way of
getting more information is to have another equation – for example:

x + y = 7 and 2x + y = 12

Now there is only one solution pair: x = 5 and y = 2.

Similarly, if x + y = 7 and x − y = 2, there is only one solution: x = 4½ and y = 2½.

Therefore, to find two unknowns we need two equations, and to find three unknowns we need
three equations, etc. These groups of equations are known as simultaneous equations.

Note, though, that for equations to be simultaneous they must satisfy two conditions – they must
be consistent and independent. For example:

 the equations x + y = 7 and 2x + 2y = 5 are inconsistent – they cannot be true

simultaneously, and no pair of values which satisfies one will satisfy the other;
 the equations 3x + 3y = 21 and 2x + 2y = 14 are not independent – they are really the
same equations, and all pairs of values which satisfy the one will satisfy the other.

2.7.1 Solution by Elimination

If two equations are true simultaneously, any other equation obtained from them will also be
true. The method of solution by elimination depends on this fact. By adding or subtracting
suitable multiples of the given equations, we can eliminate one of the unknowns and obtain an
equation containing only one unknown. Once we have done that, the resulting equation can be
solved using the methods we already know, and then the other unknown may be discovered by
substitution in the original equation. The following examples explain the method. Study them
carefully.

Example 1

Consider the following pair of equations:

3x + y = 11 (1)

x − y = −3 (2)

46
We can add the two equations together to derive a third equation which will eliminate y:

3x + y = 11

x − y = −3

4x = 8

Thus, by adding the two equations, we are left with 4x = 8. Therefore, x = 2

If we now substitute that value for x in (1), so that 3x becomes 6:

6 + y = 11 y = 11- 6 y=5

We can check that the values we have determined for x and y are correct by substituting both in
equation (2):

x − y = 2 − 5 = −3

Note that eliminating one of the unknowns (in this case, y) was possible because both the “y”s in
the original two equations had a coefficient of 1 – i.e. the coefficients were equal. (The
coefficient is simply the factor or number applied to an algebraic term, so the coefficient of the
term 3x is 3.) If we want to eliminate one of the unknowns by adding or subtracting the two
equations, the coefficients of the unknowns must be equal.

Example 2

Consider the following pair of equations:

6x + 5y = −6 (1)

18x + 7y = 6 (2)

We want one of the unknowns to have equal coefficients, but unlike in Example 1, this is not the
case here. However, we can see that the coefficient of x in (2) is a multiple of the coefficient of x
in (1). To make the coefficients equal, we derive a changed version of the same equation by
multiplying (1) by 3 and then subtract (2) from this equation:

Multiplying (6x + 5y = −6) by 3 gives:

47
18x + 15y = −18

Note that, providing we apply the same proportionate change to each term in the equation (by
multiplying or dividing each by the same number), the equation has not been changed. It is not a
new, independent equation, but simply a different way of expressing the same equation.

We can now subtract equation (2) from this:

18x + 15y = −18

18x − 7y = 6

8y = −24

y = −3

To find x, we substitute the value of y = −3 in (1) so that 5y becomes −15:

6x + (−15) = −6

By transposition, we get:

6x = −6 + 15 = 9

x = 1.5

Example 3

Consider the following pair of equations:

13x − 7y = 33 (1)

9x + 2y = 16 (2)

This time, there are no equal or multiple coefficients, so there is no obvious unknown term which
can be easily eliminated. We can, then, choose which unknown to eliminate and, to avoid large
numerical terms, we shall decide to eliminate y.

Where there are no equal or multiple coefficients, we need to change the way in which both
equations are expressed so that we can make the coefficients of one of the unknowns equal. To

48
do this here, we multiply (1) by 2 and (2) by 7, so that the coefficient of y in both equations is
14.

We can then eliminate y by adding the two equations:

26x − 14y = 66

63x + 14y = 112

89x = 178

x=2

To find y, we substitute the value of x = 2 in (2) so that 9x becomes 18:

18 + 2y = 16

By transposition, we get:

2y = 16 − 18 = −2

y = −1

Important note: When working through the processes of transposition and substitution, it is not
necessary to write − (−7) and + (−15), etc., but be sure to pay special attention to all calculations
involving negative numbers.

Practice Questions

Solve the following simultaneous equations by finding values for x and y.

1. 3x + 4y = 1

9x + 5y = 10

49
2. 5x − 3y = 14

7x + 5y = 38

3. 3x − y = 8

x + 5y = 4

4. 2x − 11y = 23

7x − 8y = 50

CHAPTER 3: BASIC BUSINESS APPLICATIONS

3.0 Introduction
This chapter will detail the rate of exchange between different currencies and convert values in
one currency into another. Secondly discounts and commissions; calculation of them from given
information will follow.

50
Formulae for simple interest and compound interest, and how it is used them to calculate any of
the amount of interest payable (or receivable), the principal, the rate of interest or the time period
covered, given information about the other variables will also be explained.

Lastly an outline of the way in which gross pay is made up and the main deductions made from
gross pay in order to leave net or take-home pay will be done. Furthermore calculation of the
income tax payable on pay, taking into account non-taxable items and personal tax allowances
will also be detailed.

3.1 Objectives
After completing this Chapter students should be able to:

 explain the rate of exchange between different currencies and convert values in one
currency into another;
 explain discounts and commissions and calculate them from given information;
 state the formulae for simple interest and compound interest, and use them to calculate
any of the amount of interest payable (or receivable), the principal, the rate of interest or
the time period covered, given information about the other variables;
 outline the way in which gross pay is made up and the main deductions made from gross
pay in order to leave net or take-home pay; calculate the income tax payable on pay,
taking into account non-taxable items and personal tax allowances

3.2 Currencies and exchange rates

3.2.1Rates of Exchange

You are, no doubt, familiar with various currency systems. They are invariably based on the
decimal number system – for example, America uses the dollar ($) and the cent, which is
equivalent to one hundredth of a dollar, France has the French franc (FF) and the centime, which

51
is one-hundredth of a franc, British currency comprises the pound sterling (£) and pence, which
are one-hundredth of a pound and Botswana uses the pula (P) and the thebe, which are one-
hundredth of a pula.

The values of the different currencies used to depend upon the amount of gold which the country
possessed, but now that we are no longer on the “gold standard”, their values depends on the
political and economic circumstances of the countries concerned. Such value is measured by how
much one unit of currency costs in another currency.

For example, one unit of British currency (£1) costs approximately 1,45 units of US currency
($1,44). This relationship of one currency to another is known as the rate of exchange.

These values vary from day to day and are quoted in most daily papers. The changes in value are
brought about by such things as changes in government, changes in government policies, the
national budget, the relationship between the value of exports and imports, etc. To give you some
idea of the scale of changes over time, before the Second World War the value of the dollar was
about 21p (i.e. $1 = £0,21), whereas now it is about 69p (i.e. $1 = £0,69). However, such large
changes usually only occur over a long period or because of some particular economic problem.

In general, the changes are very small, although they can take place quite rapidly. Even then,
although the changes may be very slight, their effects can be very large when you consider the
amounts of money involved – companies may have many millions of pounds sterling invested in
overseas currencies, and a small change in the value of those currencies can produce substantial
losses or gains, depending on the whether the value of the currency rises or falls against the
pound. The rate of exchange is expressed as a ratio. It shows the value of one unit of currency in
terms of another currency. Thus, one side of the ratio is always “1”.

Here are some examples of the rate of exchange of the

British £:

£1 = 10,55 FF

£1 = 3,15 DM (German marks)

52
£1 = $1,44

£1 = P 16

Note that, although it is a ratio, the rate of exchange is usually shown as “x = y”, rather than “x :
y”. It is this ratio which determines how much of one currency can be bought with another
currency, or how much a particular amount of one currency is worth in another.

Before we look at the relevant calculations involved in converting one currency to another, there
are two further points to note about the rate of exchange.

 For any relationship between two different currencies, the rate of exchange can be
expressed in two ways – how much one unit of one currency is worth in terms of the
other, and vice versa.

Thus, the rate of exchange between the £ and the DM could be shown as:

£1 = 3,15 DM or

1 DM = £0,32

 The rate of exchange is usually quoted in two forms – a selling price and a buying price.
The selling price determines the amount of foreign currency you will be sold for your
pounds, and the buying price determines the amount of pounds you will receive in return
for your foreign currency. (The difference between the two enables the bank or other
agency undertaking the exchange to make a profit.)

As an example of the two different prices, the rates quoted might be:

Buying rate Selling rate

£1 = 10,6 FF 10,5 FF

£1 = 3,16 DM 3,14 DM

53
 £1 = $1,43 $1,45

3.2.2 Currency Conversion

To find the value of a sum of money in one currency in terms of another currency, we could
develop a simple formula using the rate of exchange, as follows

let e = rate of exchange expressed as the number of units of a second currency

equivalent to one unit of a first currency (as in $1,44 = £1)

x = amount in first currency

y = amount in second currency

To convert a certain amount of the first currency (say, £x) into the second currency (say $y), we
multiply the amount of the first currency by the rate of exchange. Thus the formula would be:

y=x×e

So, to convert £100 into $ at the rate of £1 = $1,44, we would substitute the following values into
the formula:

x = 100

e = 1,44

The formula gives us the following calculation:

$y = 100 × 1,44 = $144

If we wanted to know much a particular sum of the second (say $y) currency would be worth in
the first (say £x) currency, we would have to rearrange the above formula to isolate “x”. To do
this, we simply divide each side of the equation by “e” – the rate of exchange:

y x ×e y
= x=
e e e

We can now apply these formulae to any given problem.

54
 1. What is the cost in £ of a bill of exchange in Paris for 1 275 francs if the rate of exchange
is £1 = 9,90 FF?
The rate of exchange is expressed as 9.90 units of one currency is equivalent to 1 unit of
the other. So, FF is the second currency and £ the first, and “x” is the amount in £s and
“y” the amount in FF.
Substituting in the second formula (to find x) we get:
1275
a. £x = £ = £128,79
9 , 90

(Note that the actual result of the calculation is £128,78787, but we round up to express it
correct to two decimal places as required for currency.)

2. Find the value of £63,40 in Swiss francs if the rate of exchange is £1 = 3.90 SF
The rate of exchange is expressed as 3.90 units of the second currency (SF) is equivalent
to 1 unit of the first (£). So, again “x” is the amount in £s and “y” the amount in SF.
Substituting in the first formula (to find y) we get:
y SF = 63.40 × 3.90 = 246.26 SF
3. Convert $3,000 to pounds given that £1 = $1,45
The rate of exchange is expressed as 1,45 units of the second currency ($) is equivalent to
1 unit of the first (£). So, again “x” is the amount in £s and “y” the amount in $.
Substituting in the second formula (to find x) we get:
£x = £ = £2 068,97

Practice Questions

1. John and Paul ate a meal in a restaurant whilst on holiday in Corfu. The meal for two cost
4 256 drachma. Calculate the cost of the meal in pounds. The exchange rate was 266 Dr
to the pound.

55
 2. The Smiths spent a holiday touring in France. While travelling they used 200 litres of
petrol which cost 4,7 francs per litre. The exchange rate was 9,8 francs to the pound.
(a) how much did the petrol cost them in pounds?
(b) what was the price per litre of the petrol in pence?
3. Before going on holiday to Germany and Austria, the Jones family changed £600 into
German marks. While in Germany they spent 824 DM and then changed the remaining
marks into Austrian schillings as they crossed the border. The exchange rate was 2,798
DM to the pound and 7,047 Sch to 1 DM. Calculate:
(a) the number of marks they received;
(b) the number of schillings they bought.

3.3 Discounts And Commission

Discounts and commissions are a practical use of percentage calculations. Let us look in more
detail at their exact meanings and the way in which they are calculated.

3.3.1 Discounts

A discount is a reduction in the selling price of an item, usually offered as an inducement for
quantity buying or for prompt payment. The discount is expressed as a percentage of the list
price (the list rice is the original price) and what the buyer actually pays is the net price – the list
price minus the discount.

To calculate a discount (D), you use the following rule or formula:

Multiply the list price (or base, B) by the rate of the discount (R) and divide by 100. Thus:

R
D=B×
100

Consider the following examples.

(a) A three-piece suite was listed as £720, but was sold at a discount of 15%. What is
the net price?

56
 15
Discount = £720 × = £108
100

Net price = £720 − £108 = £612

(b) A car was listed at £3,600 but was sold for cash less a discount of 20%. What was
the final selling price?

20
Discount = £3 600 × = £720
100

Net Price = £3 600 − £720 = £2 800

3.3.2 Commission

A commission is the amount of money paid to an agent or broker or salesman for buying or
selling goods or services. This is expressed as a percentage of the value of the goods/services
traded and is called the rate of commission.

To find the commission, we simply multiply the value of the goods/services traded (known as the
principal) by the rate of commission. Consider the following example.

Pauline obtained £6 400 of new business for the PR agency for which she works. She is paid
commission of 12½%. Calculate the amount due to her.

Commission = 12½% of £6 400

12, 5
= £6,400 × = £800
100

Commissions are also usually charged by banks, travel agents and bureau de changes to cover
their costs when carrying out a currency exchange. The commission on changing cash is
commonly £3 or 2% whichever is larger.

57
When going on holiday, most people take a limited amount of cash in the currency of each
country to be visited and take the remainder that they will need in the more secure form of
travellers cheques.

The commission charged on travellers cheques is commonly £3 or 1% whichever is larger. In

these cases, the person exchanging the currency or buying travellers cheques is charged either:

 a fixed cost – £3 per transaction; or

 a variable cost – the value of 1% or 2% of the amount of the transaction.

We shall consider fixed and variable elements in more detail later, but consider the following
example in relation to currency exchanges.

Using the rates of commission quoted above, and given that £1 = $1.47, how many dollars would
you get when converting:

(a) £100 to American dollars in cash?

(b) £200 to American dollars in cash and in travellers cheques?

In each case, we would need to work out the commission at both the fixed and the variable rate,
and then apply whichever is the larger.

(a) The commission payable on converting £100 into $ cash is either £3 or £2 (2% of £100).

The fixed rate is the larger so that would be applied:

£100 − £3 = £97

£97 × 1,47 = $142,50

(b) The commission payable on converting £200 into $ cash is either £3 or £4 (2% of £200).

The variable rate is the larger so that would be applied:

£200 − £4 = £196

58
 £196 × 1.47 = $288.12

However, the commission payable on converting £200 into $ travellers cheques is either £3 or £2
(1% of £200). The fixed rate is the larger so that would be applied:

£200 − £3 = £197

£197 × 1,47 = $289,59

Practice Questions

1. What is the price paid for a £310 washing machine with a discount of 10%?

2. What is the price paid for a £7 000 car with a discount of 15%?

3. An estate agent charges a commission of 1,5% of the value of each house he sells. How much
commission is earned by selling a house for £104 000?

4. Calculate the commission earned by a shop assistant who sold goods to the value of £824 if
the rate of commission is 3%?

5. A car salesman is paid 2,5% commission on his weekly sales over £6 000. In one particular
week, he sold two cars for £7 520 and £10 640. What was his commission for that week?

6. On a holiday touring Germany, Switzerland and Austria, a family of four decided to take the
equivalent of £900 abroad. The travel agent charges commission on each currency exchange at
the rate of £3 or 2% (whichever is the larger) for cash and £3 or 1% (whichever is the larger) for
travellers cheques.

(a) They changed £110 into Deutschmarks, £100 into Swiss francs and £120 into Austrian
schillings. How much of each currency did they receive after commission was deducted.
(b) After buying the foreign currencies, they changed as much as possible of the remaining
money into travellers cheques. The smallest value of travellers cheque which can be
bought is £10.

(i) How much did they exchange for travellers cheques?

(ii) How much commission did they pay for the cheques?

59
 (c) What was the total cost per person of the foreign currencies and travellers cheques?

Use the following exchange rates:

£1 = 2,798 Deutschmarks (DM)

£1 = 2,458 Swiss franc (SF)

£1 = 19,65 Austrian schillings (AS)

3.4 Simple Interest

Interest is what we call the amount of money someone will give you for letting them borrow
your money or what you pay for borrowing money from someone else. Hence, you can receive
interest on a loan you make to someone and you can also be asked to pay interest on a loan
which you take out. Note that, when you receive interest on savings from a bank or a building
society, this is the bank or building society paying interest to you on money which have loaned
to them.

3.4.1 Simple Interest

Simple interest (SI) is calculated on the basis of having a principal amount, say P, in the bank for
a number of years, T, with a rate of interest, R. The simple formula to work out the amount of
interest your money will earn:

PRT
SI =
100

This means that the interest is found by multiplying the principal by the rate, then by the time,
and then dividing by 100.

As we have seen from previous chapters, we can also rearrange this formula to allow us to work
out any of the variables.

Thus:

100 SI 100 SI 100 SI

P= R% = T=
RT PT PR

Consider the following examples.

60
(a) John had £16.40 in an account that paid simple interest at a rate of 9%. Calculate how much
interest would be paid to John if he kept the money in the account for 5 years.

The principal (P) is £16,40 the rate (R) is 9% and the time (T) is 5 years. So, substituting inthe
formula, we get:

16 , 40 ×9 ×5
SI =
100

(b) Calculate the length of time taken for £2 000 to earn £270 if invested at 9%.

Here need to work out T where P = £2 000, SI = £270 and R = 9. Substituting in the formula,

we get:

100× 270
= 1.5 years
2000× 9

Practice Questions

1. What is the simple interest on £250 over 3 years at 8,75% interest rate?

2. If you invest £6 750 at 8,5% per annum, how much interest will you earn and how much will
you have in your account after 4 years?

3. If you invest £5 000 at 9 25% per annum for 6 months, how much interest will you receive?

4. £10 800 was invested and at the end of each year the interest was withdrawn. After 4 years, a
total of £3 240 in interest had been withdrawn. At what annual rate of interest was the money
invested?

3.5 Compound Interest

Let us now look at how compound interest differs from simple interest.

If an amount of money is invested and the interest is added to the investment, then the principal
increases and, hence, the interest earned gets bigger each year. Suppose you begin with £1 000
and the interest is 8% per year. The interest in the first year is 8% of £1 000 which is £80.
Adding this to the original principal, the amount invested at the end of the first year is £1 080.

61
Now, in the second year, the interest is 8% of £1 080 which is £86,40. The amount accrued at the
end of the second year is £1 166,50.

You can continue working out the amounts in this way. However, to find the amount at the end
of any year, you are finding 100% + 8% = 108% of the amount at the beginning of the year. So
you can multiply by 1,08 each time.

There is a standard formula which can be used to calculate compound interest, as follows:

( )
n
r
A=P 1+
100

where: A = Accrued amount P = Original principal

r = Rate of interest (for a particular time period, usually annual)

n = Number of time periods

Consider the following examples:

(a) £3 000 is invested in an account paying 12% compound interest per year. Find the value of
the investment after 3 years.

Working this out year by year, we get:

Investment at the beginning of year 1 = £3 000

Interest at 12% (of £3 000) = £360

Value of the investment after 1 year = £3 000 + £360 = £3 360

Interest at 12% (of £3 360) = £403,20

Value of investment after 2 years = £3 360 + £403,20 = £3 763,20

Interest at 12% (of £3 763,20) = £451,58

Value of the investment after 3 years = £3 763,20 + £451,58 = £4 214,78

62
 ( )
n
r
Alternatively, we could use the formula: A=P 1+
100

where: P = £3 000 r = 12% n=3

( )
n
r
Substituting these values in the formula gives: A=P 1+
100

( ) = £3 000 × 1,12
3
12
A=3000 1+ 3
100

A= £3 000 × 1,404928

A= £4 214,78 (to the nearest p)

£2000 is invested in a high interest account for one and a half years. The interest rate is 10.5%
per annum, and it is paid into the account every six months. Calculate the value of the investment
after this time and the amount of interest earned.

The rate of interest for 1 year = 10.5%

( )
n
r
Therefore, the rate of interest for 6 months = 5.25% A=P 1+
100

where: P = £2,000 r = 5.25% n = 3

( )
3
5 ,25
Substituting these values in the formula gives: A=2000 1+
100

= £2,000 × 1.05253

= £2,000 × 1.1659134

Value of the investment after 1,5 years= £2,331.83 (to the nearest p)

Total compound interest earned = £2,331.83 − £2,000 = £331.83

Practice Questions

63
 1. £6 000 is invested at 10% per annum compound interest which is paid
annually. How much is in the account after 3 years?
2. £2,000 is invested at 10% per annum payable every 6 months. How much is in
the account at the end of 1½ years?
3. One building society offers an interest rate of 8.5% per annum payable half-
yearly. A second offers 8.75% payable annually. If you had £2,000 to invest,
which savings account should you choose?

3.6 Annuity
An annuity is a contractual financial product sold by financial institutions that is designed to
accept and grow funds from an individual and then, upon annuitisation pay out a stream of
payments to the individual at a later point in time. The period of time when an annuity is being
funded and before payouts begin is referred to as the accumulation phase Once payments
commence, the contract is in the annuitisation phase

3.6.1 Types of Annuities

Annuities can be structured generally as either fixed or variable. Fixed annuities provide regular
periodic payments to the annuitant.

Variable annuities allow the owner to receive greater future cash flows if investments of the
annuity fund do well and smaller payments if its investments do poorly. This provides for a less
stable cash flow than a fixed annuity, but allows the annuitant to reap the benefits of strong
returns from their fund’s investments.

Present Value of Annuity

64
The present value of annuity formula determines the value of a series of future periodic
payments at a given time. The present value of annuity formula relies on the concept of time
value of money, in that one dollar present day is worth more than that same dollar at a future
date.

3.7 Pay and Taxation

3.7.1 Make Up of Pay

All employees receive a financial reward as payment for their labour. At its most basic, this is
paid in the form of either a salary or wages. Salaries are generally paid monthly and are based on
a fixed annual amount. Thus:

Annual Salary
Monthly pay =
12

For example, an employee with an annual salary of £18 000 would receive £1 500 every month
(£18 000 ÷ £1 500).

Wages are generally paid weekly and are usually based on a fixed rate for working a certain
number of hours. For example, many wage earners are required to work a fixed number of hours
in a week, and they are paid for these hours at a basic hourly rate.

Thus, an office clerk is paid £4 per hour for a 40 hour week. What is his weekly wage?

Weekly wage = Rate of pay × Hours worked

= £4 × 40

= £160

65
An employee can often increase a basic wage by working longer than the basic week – i.e. by
doing overtime. A higher hourly rate is usually paid for these additional hours, the most common
rates being time and a half (i.e. 1½ times the basic hourly rate) and double time (twice the basic
hourly rate).

Consider, for example, a factory worker who works a basic 36 hour week for which she is paid a
basic rate of £5,84 per hour. In addition, she works 5 hours overtime at time and a half and 3
hours overtime at double time. Calculate her weekly wage.

Basic pay: = 36 hours × £5,84 = £210,24

Overtime @ at time and a half: = 5 hours × (£5,84 × 1.5) = £43,80

Overtime @ at double time: = 3 hours × (£5,84 × 2) = £35,04

Total pay: = £289,08

People who are employed as salespersons or representatives, and some shop assistants, are often
paid a basic salary or wage plus a percentage of the value of the goods they have sold. In some
cases, their basic salary or wage can be quite small, or even non-existent, and the commission on
their sales forms the largest part of their pay.

For example, a salesman earns a basic salary of £8,280 per year plus a monthly commission of
5% on all sales over £5,000. What would be his income for a month in which he sold goods to
the value of £9 400?

Annual Salary £ 8 280

Basic monthly pay = = = £690
12 12

He earns commission on (£9 400 − £5 000) worth of sales

Commission = 5% of (£9 400 − £5 000) = 0,05 × £4 400 = £220

Total monthly pay = Basic pay + Commission

= £690 + £220

= £910

66
Practice Questions

1. Calculate the weekly wage of a factory worker if she works 42 hours per week at a rate of
pay of £5,25 per hour
2. If an employee’s annual salary is £18 750 how much is she paid per month?
3. A basic working week is 36 hours and the weekly wage is £306. What is the basic hourly
rate?
4. A trainee mechanic works a basic 37,5 hour week at an hourly rate of £4,90. He is paid
overtime at time and half. How much does he earn in a week in which he does 9 hours
overtime?

5. An employee’s basic wage is £6,20 per hour, and she works a basic 5 day, 40 hour week.
If she works overtime during the week, she is paid at time and a half. Overtime worked at
the weekend is paid at double time. Calculate her wage for a week when she worked five
hours overtime during the week and four hours overtime on Saturday.
6. An insurance representative is paid purely on a commission basis. Commission is paid at
8% on all insurance sold up to a value of £4 000 per week. If the value of insurance sold
exceeds £4 000, he is paid a commission of 18% on the excess. Calculate his total pay for
the 4 weeks in which his sales were £3 900, £4 500, £5 100 and £2 700.

3.7.2 Taxation

The total earnings made up in the above way is known as gross pay. Unfortunately, very few
employees actually receive all the money they have earned. Certain amounts of money are
deducted from gross pay and the pay the employee actually ends up with is the net pay or take-
home pay.

The two main deductions are:

Income tax; and Pension contributions.

There are often other deductions – some being further national or local taxes on pay and others
being deductions made by the employer for work specific reasons (such as repayments of a loan
for a car or for a public transport season ticket).

67
Income tax is a major source of finance for the government and is used to fund all types of public
expenditure. The tax is a percentage of gross pay, based on the amount a person earns in a tax
year that begins on 6th April and ends on 5th April the following year. The % rate at which the
tax is applied varies according to the level of income. The amount of gross income on which tax
is payable (known as taxable pay) may be affected by the provision of certain allowances within
the tax system and also by certain elements of pay or deductions being exempted from tax ( non-
taxable items). The rates of tax applied to particular bands of income, and the levels of
allowances, are decided each year by the government as part of the Budget.

The UK system divides taxable pay into three bands of income. For simplicity, we shall consider
the bands and the rate of tax applied to each to be as follows:

Annual taxable income Tax rate

0 – £2 400 10%

£2 401 – £28 000 22%

£28 001 and above 40%

This means that, for a person with a total taxable pay of £15 000 in a year, the total tax liability
would be:

£2 400 × 10% = £240

(£15,000 − £2,400) × 22% = £2 772
£3 012
These annual tax bands can be converted into monthly or weekly amounts for calculating tax on
a PAYE basis and deducting the correct amount from an employees gross pay:

Tax rate Annual taxable income Monthly taxable income Weekly

Taxable income
10% 0 – £2 400 0 – £200 0 – £46

22% £2 401 – £28 000 £201 – £2 333 £47 – £538

40% £28 001 and above £2 334 and above £539 and above
68
There are many possible allowances and non-taxable items which affect the level of taxable pay.
Here we shall consider just two.

3.7.3 Personal allowances

The amount of money an individual is allowed to earn each year before he/she starts to pay tax.
This amount (sometimes called free-pay) depends on the individual’s circumstances – for
example, whether they are single or married, number of children, etc. If your personal
allowances are greater than your actual pay, then you would pay no income tax at all. The levels
of personal allowances are generally set as an annual amount, but this can be converted into
monthly or weekly amounts of “free-pay”.

3.7.4 Pensions contributions

The amounts paid by an individual into a pensions scheme, such as an employer’s occupational
pension scheme, are not taxable. Therefore, pensions contributions, where they are deducted
from pay by the employer, may also be deducted from gross pay before calculating tax. (Note
that this does not necessarily apply to any other types of deductions from pay. Where pensions
contributions are not paid through the employer, an adjustment may be made to a person’s
personal allowances to allow for them.)

Now we can develop a framework for calculating the amount of tax payable annually, using the
tax bands set out above.

Gross taxable pay = Gross pay − Non-taxable items

Net taxable pay = Gross taxable pay − Personal allowances

Tax liability = First £2,400 of Net taxable pay × 10%

plus next £25,600 of Net taxable pay × 22%

plus remainder of Net taxable pay × 40%

Consider the following examples, using the bands and tax rates set out above.

69
(a) How much annual tax will be paid by someone who earns £18 600 per annum and has
personal allowances of £5 800? What is the monthly tax deduction?

There are no non-taxable items specified so:

Gross taxable pay = Gross pay − Non-taxable items

= £18 600

Net taxable pay = Gross taxable pay − Personal allowances

= £18 600 − £5 800

= £12 800

Tax liability = £2 400 × 10% = £240

+ (£18 600 − £2 400) × 22% = £3 564

= £3 804

The monthly income tax deducted will be £3 804 divided by 12 = £317

(b) How much annual tax will be paid by someone who earns £43 000 per annum, has personal
allowances of £4,400 and pays pension contributions through his employer at a rate of 5% of his
annual salary.

Here, the pension contributions are non-taxable, so:

Gross taxable pay = £43,000 − (£43 000 × 5%) = £40 850

Net taxable pay = £40 850 − £4 400 = £36 450

Tax liability = £2 400 × 10% = £240

+ £25 600 × 22% = £5 632

+ (£36 450 − £28 000) × 40% = £3 380

= £9 252

70
Note that taxation questions are often set without reference to income bands with different
taxation rates applying, or without reference to deductions from gross pay or personal
allowances. Always answer the question using the information supplied.

For example:

How much tax will be paid each month by someone who earns £24,000 per annum if the
tax rate is 25%?

£ 24 000
Net taxable pay per month, based on the information supplied = = £2,000
2 000

Tax liability = £2 000 × 25% = £500 per month

Practice Questions

1. An employee is paid a salary of £24 492 per annum which he receives in 12 monthly
payments. He has personal allowances amounting to £4 800. If tax is payable at the rate
of 24%, calculate his monthly pay.
2. If, in the next Budget, the Chancellor changes the rate of income tax from 24% to 23%,
but wages remain the same, how much less tax will be paid by the employee in question 1
above.
3. Someone whose personal tax allowance is £4 800 is paid a weekly wage of £80. Would
this person have to pay tax?
4. An employee has a gross income of £23 000 and personal allowances of £5 000. She pays
£3600 tax. What is the rate of income tax?
5. A weekly paid worker receives a basic wage of £5,50 per hour for a 37,5 hour week.
Overtime is paid at a rate of time and a half for the first five hours, and at double time for
any additional hours worked. She also belongs to an occupational pension scheme,
making contributions at a rate of 6% of basic earnings only. As a single mother, she has a
personal taxation allowance of £5 850. Calculate her net pay in a week when she works
48 hours if the tax bands and rates are as set out above

71
 CHAPTER 4: STATISTICS AND DATA ANALYSIS

4.0 Introduction
This Chapter is concerned specifically with statistics.

“Statistics” is a word which is used in a variety of ways and with a variety of meanings, but, in
whatever way it is used, it is always concerned with numerical information. There are two
particular meanings of the word namely:

 The numerical facts themselves – for example, we talk of the “statistics” of steel
production.
 The methods of analysing the facts – in this sense, “statistics” is the title of a subject like
“arithmetic” or “chemistry” or “physics”. Sometimes the subject is called “statistical
method”.

Thus, statistics is concerned with numerical facts about a problem or issue – the facts themselves
and methods of analysing them in order to solve or shed light on the problem or issue. The
numerical facts with which statistics is concerned are commonly called data. So, therefore, we
talk about the collection and analysis of data in respect of a particular problem.

The methods used for analysing data can be divided into two categories – descriptive and
inferential.

 Descriptive methods simply manipulate the available data in order to convey information
about that data – often in the form of summaries or graphical displays, and usually for the
purpose of simplifying comprehension or appreciation of the facts. These methods are
concerned only with the available data, even if that data is only a part of a (possibly much
larger) whole.
 Inferential methods use the available data in order to make general statements about the
whole from which that data is only a part – i.e. they allow us to infer something about the
whole from a study of just a part of it. Predictions and estimates are typical of the general
conclusions which may be made by using inferential methods.

72
4.1 Objectives
When students have completed this chapter they should be able to:

 explain the concept of data in statistics;

 distinguish between primary and secondary data, and explain the differences between
quantitative and qualitative variables and between continuous and discrete variables;
 explain the reasons for classifying and tabulating data, and prepare tables from given
data;
 explain the concept of a frequency distribution and define the terms class interval, class
boundary and class interval;
 prepare simple, grouped, cumulative and relative frequency distributions from given data.

4.2 Methods of collecting data

The methods usually available are as follows:

 Use of published statistics

 Personal investigation/interview
 Delegated personal investigation/interview
 Questionnaire.

4.2.1: Published Statistics

We can often make good use of the great amount of statistical data published by governments,
the United Nations, nationalised industries, chambers of trade and commerce and so on. When
using this method, it is particularly important to be clear on the definition of terms and units and
on the accuracy of the data. The source must be reliable and the information up-to-date.

This type of data is sometimes referred to as secondary data in that the investigator himself has
not been responsible for collecting it and it thus came to him “second-hand”.

By contrast, data which has been collected by the investigator for the particular survey in hand is
called primary data. The information you require may not be found in one source but parts may
appear in several different sources.

Although the search through these may be time-consuming, it can lead to data beingobtained
relatively cheaply and this is one of the advantages of this type of data collection. Of course, the
73
disadvantage is that you could spend a considerable amount of time looking for information
which may not be available.

Another disadvantage of using data from published sources is that the definitions used for
variables and units may not be the same as those you wish to use. It is sometimes difficult to
establish the definitions from published information, but, before using the data, you must
establish what it represents.

4.2.2: Personal Investigation/Interview

In this method the investigator collects the data him/herself. This method has the advantage that
the data will be collected in a uniform manner and with the subsequent analysis in mind.

However, the field that may be covered by personal investigation may, naturally, be limited.
There is sometimes a danger that the investigator may be tempted to select data that accords with
preconceived notions. The personal investigation method is also useful if a pilot survey is carried
out prior to the main survey, as personal investigation will reveal the problems that are likely to
occur.

4.2.3: Delegated Personal Investigation/Interview

When the field to be covered is extensive, the task of collecting information may be too great for
one person. Then a team of selected and trained investigators or interviewers may be used. The
people employed should be properly trained and informed of the purposes of the investigation;
their instructions must be very carefully prepared to ensure that the results are in accordance with
the “requirements” of the study.

If there are many investigators, personal biases may tend to cancel out. Care in allocating the
duties to the investigators can reduce the risks of bias. For example, if you are investigating the
public attitude to a new drug in two towns, do not put investigator A to explore town X and
investigator B to explore town Y, because any difference that is revealed might be due to the
towns being different, or it might be due to different personal biases on the part of the two
investigators. In such a case, you would try to get both people to do part of each town.

4.2.4: Questionnaire

74
In some enquiries the data consists of information which must be supplied by a large number of
people. The most convenient way to collect such data is to issue questionnaire forms to the
people concerned and ask them to fill in the answers to a set of printed questions.

This method is usually cheaper than delegated personal investigation and can cover a wider field.
A carefully thought-out questionnaire is often also used in the previous methods of investigation
in order to reduce the effect of personal bias.

The distribution and collection of questionnaires by post suffers from two main drawbacks:

 The forms are completed by people who may be unaware of some of the requirements
and who may place different interpretations on the questions – even the most carefully
worded ones!
 There may be a large number of forms not returned, and these may be mainly by people
who are not interested in the subject or who are hostile to the enquiry.

The result is that we end up with completed forms only from a certain kind of person and thus
have a biased sample. For this reason, it is essential to include a reply-paid envelope to
encourage people to respond.

If the forms are distributed and collected by interviewers, a greater response is likely and queries
can be answered. This is the method used, for example, in the Botswana Population Census. Care
must be taken, however, that the interviewers do not lead respondents in any way.

4.3 Types of data

There are a number of different ways in which data may be categorised.

4.3.1: Primary and secondary data

Primary data is data which is both original and has been obtained in order to solve the specific
problem in hand. Primary data is, therefore, raw data and has to be classified and processed using
appropriate statistical methods in order to reach a solution to the problem.

Secondary data is any data other than primary data. Thus, it includes any data which has been
subject to the processes of classification or tabulation or which has resulted from the application
of statistical methods to primary data, and all published statistics.

75
4.3.2: Quantitative and qualitative

Quantitative variables, to which we shall restrict discussion here, are those for which
observations are numerical in nature.

Qualitative variables have non-numeric observations, such as colour of hair, although, of course,
each possible non-numeric value may be associated with a numeric frequency.

4.3.3: Continuous and discrete

A continuous variable may take any value between two stated limits (which may possibly be
minus and plus infinity). Height, for example, is a continuous variable, because a person’s height
may (with appropriately accurate equipment) be measured to any minute fraction of a millimetre.

A discrete variable, however, can take only certain values occurring at intervals between stated
limits. For most (but not all) discrete variables, these interval values are the set of integers
(whole numbers).

For example, if the variable is the number of children per family, then the only possible values
are 0, 1, 2, etc. because it is impossible to have other than a whole number of children. However,
in Britain, shoe sizes are stated in half-units, and so here we have an example of a discrete
variable which can take the values 1, 1½, 2, 2½, etc.

4.4 Requirements of Statistical Data

Having decided upon the preliminary matters about the investigation, the statistician must look in
more detail at the actual data to be collected. The desirable qualities of statistical data are as
follows.

4.4.1: Homogeneity

76
Houses cannot be compared unless they are of a similar size or value. If the data is found not to
be homogeneous, there are two methods of adjustment possible.

(a) Break down the group into smaller component groups which are homogeneous and study
them separately.
(b) Standardise the data. Use units such as “output per man-hour” to compare the output of
two factories of very different size. Alternatively, determine a relationship between the
different units so that all may be expressed in terms of one – in food consumption
surveys, for example, a child may be considered equal to half an adult.

4.4.2: Completeness

Great care must be taken to ensure that no important aspect is omitted from the enquiry.

4.4.3: Accurate definition

Each term used in an investigation must be carefully defined; it is so easy to be slack about this
and to run into trouble. For example, the term “accident” may mean quite different things to the
injured party, the police and the insurance company. When using other people’s statistics, for
changes in definition. Acts of Parliament may, for example, alter the definition of an “indictable
offence” or of an “unemployed person”.

4.4.4: Uniformity

The circumstances of the data must remain the same throughout the whole investigation. It is no
use, for example, comparing the average age of workers in an industry at two different times if
the age structure has changed markedly. Likewise, it is not much use comparing a firm’s profits
at two different times if the working capital has changed.

77
4.5 Tabulation of Data
Having completed the survey and collected the data, there is need to organise it so that useful
information can be extracted and then present our results. The data will very often consist of a
mass of figures in no very special order. For example, we may have a card index of the 3,000
workers in a large factory; the cards are probably kept in alphabetical order of names, but they
will contain a large amount of other data such as wage rates, age, sex, type of work, technical
qualifications and so on. If are required to present to the factory management a statement about
the age structure of the labour force (both male and female), then the alphabetical arrangement
does not help, and no one could possibly gain any idea about the topic from merely looking
through the cards as they are.

What is needed is to classify the cards according to the age and sex of the worker and then
present the results of the classification as a tabulation.

4.6 Forms of Tabulation

We can classify the process of tabulation into simple tabulation and complex or matrix
tabulation.

4.6.1: Simple Tabulation

This covers only one aspect of the set of figures. The idea is best conveyed by an example.
Consider the card index of 3,000 workers mentioned earlier. Assume that each card carries the
name of the workshop in which the person works. A question as to how the labour force is
distributed can be answered by sorting the cards and preparing a simple table as follows:

Table 4.1: Distribution of workers by workshop

Workshop Number Employed

A 600
B 360
C 660
D 840
E 540
TOTAL 3 000
Note that such simple tables do not tell us
very much - although it may be enough for the question of the moment.

78
4.6.2: Complex tabulation

This deals with two or more aspects of a problem at the same time. In the problem just studied, it
is very likely that the two questions would be asked at the same time, and we could present the
answers in a complex table or matrix.

Table 4.2: Distribution of workers and wages by workshop

This table is much more informative than are the previous simple table, but it is more
complicated. We could have complicated it further by dividing the groups into, say, male and
female workers, or into age groups.

4.6.3 Secondary Statistical Tabulation

So far, tables above have merely classified the already available figures – the primary statistics.

However, we can go further than this and do some simple calculations to produce other figures –
secondary statistics. As an example, take the first simple table illustrated from the previous page,
and calculate how many employees there are on average per workshop. This is obtained by
dividing the total (3 000) by the number of shops (5), and the table appears as follows:

79
Table 4.3: Distribution of workers by workshop

The average is a “secondary statistic”.

For another example, we may take the second simple table given above and calculate the
proportion of workers in each wage group, as follows:

Table 4.4: Wage distribution

The proportions given here are also secondary statistics. In commercial and business statistics, it
is more usual to use percentages than proportions – so in the above table, these would be 3,5%,
17%; 30,7%; 33,8%; 10% and 5%.

Secondary statistics are not, of course, confined to simple tables; they are used in complex tables
too, as in this example:

80
Table 4.5: Inspection results for a factory product in two successive years

The percentage columns and the average line show secondary statistics. All the other figures are
primary statistics.

Note carefully that percentages cannot be added or averaged to get the percentage of a total or
of an average. Percentages must be worked out on the totals or averages themselves.

Another danger in the use of percentages has to be watched, and that is that you must not forget
the size of the original numbers. Take, for example, the case of two doctors dealing with a
certain disease. One doctor has only one patient and he cures him – 100% success! The other
doctor has 100 patients of whom he cures 80 – only 80% success! You can see how very unfair it
would be on the hard-working second doctor to compare the percentages alone.

4.7: Rules for Tabulation

There are no absolute rules for drawing up statistical tables, but there are a few general principles
which, if borne in mind, to help present data in the best possible way.

 Try not to include too many features in any one table (say, not more than four or five) as
otherwise it becomes rather clumsy. It is better to use two or more separate tables.
 Each table should have a clear and concise title to indicate its purpose.
 It should be very clear what units are being used in the table (tonnes, £, people, £000,
etc.).

81
 Blank spaces and long numbers should be avoided, the latter by a sensible degree of
approximation.
 Columns should be numbered to facilitate reference.
 Try to have some order to the table, using, for example, size, time, geographical location
or alphabetical order.
 Figures to be compared or contrasted should be placed as close together as possible.
 Percentages should be pleased near to the numbers on which they are based.
 Rule the tables neatly – scribbled tables with freehand lines nearly always result in
mistakes and are difficulty to follow. However, it is useful to draw a rough sketch first so
that you can choose the best layout and decide on the widths of the columns.
 Insert totals where these are meaningful, but avoid “nonsense totals”. Ask yourself what
the total will tell you before you decide to include it. An example of such a “nonsense
total” is given in the following table:

Table 4.6: Election Results

 The totals (470) at the foot of the two columns make sense because they tell us the total
number of seats being contested, but the totals in the final column (550, 390, 940) are
“nonsense totals” for they tell us nothing of value.
 If numbers need to be totalled, try to place them in a column rather than along a row for
easier computation.
 If there is need to emphasise particular numbers, then underlining, significant spacing or
heavy type can be used. If data is lacking in a particular instance, then insert an asterisk
(*) in the empty space and give the reasons for the lack of data in a footnote.
 Footnotes can also be used to indicate, for example, the source of secondary data, a
change in the way the data has been recorded, or any special circumstances which make

82
 the data see odd.

4.8 Frequency Distributions

A frequency distribution is a tabulation which shows the number of times (i.e. the frequency)
each different value occurs. For example, the following figures are the times (in minutes) taken
by a shop-floor worker to perform a given repetitive task on 20 specified occasions during the
working day:

3.5 3.8 3.8 3.4 3.6

3.6 3.8 3.9 3.7 3.5

3.4 3.7 3.6 3.8 3.6

3.7 3.7 3.7 3.5 3.9

If we now assemble and tabulate these figures, we can obtain a frequency distribution as follows:

Table 4.7: Time taken for one worker to perform task

4.8.1: Simple Frequency Distributions

A useful way of preparing a frequency distribution from raw data is to go through the records as
they stand and mark off the items by the “tally mark” or “five-bar gate” method.

First look at the figures to see the highest and lowest values so as to decide the range to be
covered and then prepare a blank table. Then mark the items on your table by means of a tally
mark.
83
To illustrate the procedure, the following table shows the procedure for the above example after
all 20 items have been entered.

Table 4.8: Time taken for one worker to perform task

4.8.2: Grouped Frequency Distributions

Sometimes the data is so extensive that a simple frequency distribution is too cumbersome and,
perhaps, uninformative. Then we make use of a “grouped frequency distribution”. In this case,
the “length of time” column consists not of separate values, but of groups of values:

Table 4.8: Time taken for one worker to perform task

Grouped frequency distributions are only needed when there is a large number of values and, in
practice, would not have been required for the small amount of data in our example.

Table 4.8 shows a grouped frequency distribution used in a more realistic situation, when an
ungrouped table would not have been of much use.

84
Table 4.9: Age distribution of workers in an office

The various groups (for example, “26 – 30”) are called “classes” and the range of values covered
by a class (five years in this example) is called the “class interval”. The number of items in each
class (for example, 28 in the 26 – 30 class) is called the “class frequency” and the total number
of items (in this example, 220) is called the “total frequency”.

The term “class boundary” is used to denote the dividing line between adjacent classes, so in the
age group example the class boundaries are 16, 21, 26, .... years. In the length of time example,
as grouped earlier in this section, the class boundaries are 3.35, 3.55, 3.75, 3.95 minutes. This
needs some explanation. As the original readings were given correct to one decimal place, we
assume that is the precision to which they were measured. If we had had a more precise
stopwatch, the times could have been measured more precisely. In the first group of 3.4 to 3.5
are put times which could in fact be anywhere between 3.35 and 3.55 if we had been able to
measure them more precisely. A time such as 3.57 minutes would not have been in this group as
it equals 3.6 minutes when corrected to one decimal place and it goes in the 3.6 to 3.7 group.

Another term, “class limits”, is used to stand for the lowest and highest values that can actually
occur in a class. In the age group example, these would be 16 years and 20 years 364 days for the
first class, 21 years and 25 years 364 days for the second class and so on, assuming that the ages
were measured correct to the nearest day below. In the length of time example, the class limits
are 3.4 and 3.5 minutes for the first class and 3.6 and 3.7 minutes for the second class.
85
4.9 Choice of Class Interval
When compiling a frequency distribution make the length of the class interval equal for all
classes so that fair comparison can be made between one class and another. Sometimes,
however, this rule has to be broken – for example, some grouped frequency distributions bring
together the first few classes and the last few classes because there are few instances in each of
the individual classes.

In such cases, before using the information, it is as well to make the classes comparable by
calculating a column showing “frequency per interval of so much”, as in this example for wage
statistics:

Table 4.10: Annual income statistic

Notice that the intervals in the first column are:

200, 200, 400, 400, 400, 800.

These intervals let you see how the last column was compiled.

A superficial look at the original table (first two columns only) might have suggested that the
most frequent incomes were at the middle of the scale, because of the appearance of the figure
55 000. But this apparent preponderance of the middle class is due solely to the change in the
length of the class interval, and column three shows that, in fact, the most frequent incomes are
at the bottom end of the scale, i.e. the top of the table.

86
Remember that the purpose of compiling a grouped frequency distribution is to make sense of an
otherwise troublesome mass of figures. It follows, therefore, that there should not be too many
groups or we will be little better off; nor do we want too few groups or we will fail to see the
significant features of the distribution.

4.6.1: Cumulative Frequency Distributions

Very often we are not specifically interested in the separate class frequencies, but in the number
of items above or below a certain value. When this is the case, we form a cumulative frequency
distribution as illustrated in column three of the following table:

Table 4.11: Time taken for one worker to perform task

The cumulative frequency tells us the number of items equal to or less than the specified value,
and it is formed by the successive addition of the separate frequencies. A cumulative frequency
column may also be formed for a grouped distribution.

The above example gives us the number of items “less than” a certain amount, but we may wish
to know, for example, the number of persons having more than some quantity. This can easily
be done by doing the cumulative additions from the bottom of the table instead of the top, and as
an exercise you should now compile the “more than” cumulative frequency column in the above
example.

87
Relative Frequency Distributions

All the frequency distributions which we have looked at so far in this study unit have had their
class frequencies expressed simply as numbers of items. However, remember that proportions or
percentages are useful secondary statistics. When the frequency in each class of a frequency
distribution is given as a proportion or percentage of the total frequency, the result is known as a
“relative frequency distribution” and the separate proportions or percentages are the “relative
frequencies”.

The total relative frequency is, of course, always 1.0 (or 100%). Cumulative relative frequency
distributions may be compiled in the same way as ordinary cumulative frequency distributions.
As an example, the distribution used in Table 6.14 is now set out as a relative frequency
distribution for you to study.

Table 4.12: Annual income statistics

This example is in the “less than” form, and you should now compile the “more than” form in
the same way as you did for the non-relative distribution.

CHAPTER 5: DATA PRESENTATION

5.0 Introduction
This chapter covers further methods of summarising and presenting data to provide useful
information. Diagrams are particularly effective as a means of conveying quite complex

88
information. Presenting information visually is easy to understand and enables broad
distributions and trends to be taken in quickly.

However, they are rarely as accurate as the figures themselves and details are likely to be lost. In
this first part of the unit specific graphical forms of presenting frequency distributions of the type
considered in the previous chapter will be examined. A number of common graphical
presentations that are designed more for the lay reader than someone with statistical knowledge
will also be discussed.

5.1 Objectives
After completing this study unit students should be able to:

 use frequency frequency bar charts, pictograms, pie charts to represent frequency
distributions;
 prepare pictograms, pie charts and bar charts from given data, and discuss the
circumstances in which each form of presentation is most effective;
 describe the general rules and principles for using graphical representations of data.

5.2 Pictograms
This is the simplest method of presenting information visually. These diagrams are variously
called “pictograms”, “ideograms”, or “picturegrams” – the words all refer to the same thing.
Their use is confined to the simplified presentation of statistical data for the general public.

Pictograms consist of simple pictures which represent quantities. There are two types and these
are illustrated in the following examples. The data we will use is shown in Table 5.1

Table 5.1: Cruises organised by a shipping line between Year 1 and Year 3

Year Number of cruises Number of

89
 passengers carried
1 200 100 000
2 250 140 000
3 300 180 000

5.2.1: Limited Form

We could represent the number of cruises by showing pictures of ships of varying size, as in
Figure 5.1
Figure 5.1: Number of cruises Years 1-3

(Source: Table 5.1)

Although these diagrams show that the number of cruises has increased each year, they can give
false impressions of the actual increases. The reader can become confused as to whether the
quantity is represented by the length or height of the pictograms, their area on the paper, or the
volume of the object they represent. It is difficult to judge what increase has taken place.
(Sometimes you will even find pictograms in which the sizes shown are actually wrong in
relation to the real increases.)
5.2.2: Accurate Form
If the purpose of the pictogram is to convey anything but the most minimal of information, to
avoid confusion, it is better to try and give it a degree of accuracy in representing the numerical

90
data. This is usually through representing specific quantities of the variable with pictures or
graphics of some sort – usually related to the subject of the variable.
So, the number of passengers could be represented by using pictures of people as in
Figure 5.2
Figure 5.2: Number of passengers carried Years 1-3

(Source: Table 7.8)

Each matchstick man is the same height and represents 20,000 passengers, so there can be no
confusion over size. These diagrams have no purpose other than generally presenting statistics in
a simple way. They are not capable of providing real accurate detail.

5.3 Pie Charts

These diagrams, known also as circular diagrams, are used to show the manner in which various
components add up to a total. Like pictograms, they are only used to display very simple
information to non-expert readers. They are popular in computer graphics.
An example will show what the pie chart is. Suppose that we wish to illustrate the sales of gas in
Great Britain in a certain year.

The figures are taken from the Annual Abstract of Statistics as shown in Table 5.2
Table 5.2: Gas sales in Great Britain in One Year
Uses Million Therms %

91
 Domestic 1 383 51
Industrial 843 31
Commercial 437 16
Public* 60 2
Total 2 723 100
(Source: Annual Abstract of Statistics, Great Britain)
* Central and local government uses, including public lighting
The figures are illustrated as the pie chart or circular diagram in Figure 5.3

Figure 5.3: Example of a pie chart – gas sales in Great Britain

2
16

Domestic
Industrial
51 Commercial
Public*

31

 There are a number of simple steps to creating a pie chart.

 Tabulate the data and calculate the percentages.
 Convert the percentages into degrees, e.g.
51
51% of 360° = × 360° = 183.6°, etc.
100
 Construct the diagram by means of a pair of compasses and a protractor. Don’t overlook
this point, because inaccurate and roughly drawn diagrams do not convey information
effectively.

92
  Label the diagram clearly, using a separate “legend” or “key” if necessary. (A key is
illustrated in Figure 5.3) You can insert the exact figures for the each segment if more
detail is required, since it is not possible to read this exactly from the diagram itself.
 If you have the choice, don’t use a diagram of this kind with more than four or five
component parts.
 The main use of a pie chart is to show the relationship each component part bears to the
whole. They are sometimes used side by side to provide comparisons, but this is not
really to be recommended, unless the whole diagram in each case represents exactly the
same total amount, as other diagrams (such as bar charts, which we discuss next) are
much clearer.

5.4 Bar Charts

We have already met one kind of bar chart in the course of our studies of frequency distributions,
namely the frequency bar chart. The bars there were simply thick lines representing, by their
length, the frequencies of different values of the variate. The idea of a bar chart can, however, be
extended beyond the field of frequency distributions, and we will now illustrate a number of the
types of bar chart in common use.
We say “illustrate” because there are no rigid and fixed types, but only general ideas which are
best studied by means of examples. You can supplement the examples in this study unit by
looking at the commercial pages of newspapers and magazines.

5.4.1 Component Bar Chart

This first type of bar chart serves the same purpose as a circular diagram and, for that reason, is
sometimes called a “component bar diagram” (see Figure 5.4).

Figure 5.4: Component bar chart showing gas sales in Great Britain

93
 900 843
800
700
600
500 437 Million Therms
400 %
300
200
100 51 60
31 16
0 2
0
Domestic Industrial Commercial Public*

Note that the lengths of the components represent the amounts, and that the components are
drawn in the same order so as to facilitate comparison. These bar charts are preferable to circular
diagrams because:
 They are easily read, even when there are many components.
 They are more easily drawn.
 It is easier to compare several bars side by side than several circles.
Bar charts with vertical bars are sometimes called “column charts” to distinguish them from
those in which the bars are horizontal (see Figure 7.14).
Figure 5.5: Horizontal bar chart of visitors arriving in the UK in one year
European Common Wealth USA Others
51% 23% 24% 4%

This figure is also an example of a percentage component bar chart, i.e. the information is
expressed in percentages rather than in actual numbers of visitors.

When comparing several percentage component bar charts, each bar chart will be the same
length, as they each represent 100%, but they will not necessarily represent the same actual

94
quantities – for example, 50% might have been 1 million, whereas in another year it may have
been nearer to 4 million and in another to 8 million.
5.4.2 Horizontal Bar Chart
A typical case of presentation by a horizontal bar chart is shown in Figure 5.6 Note how a loss is
shown by drawing the bar on the other side of the zero line.

Figure 5.6: Horizontal bar chart for the So and So Company Ltd to show profits made by
branches in Year 1 and Year 2

Pie charts and bar charts are especially useful for “categorical” variables as well as for numerical
variables. The example in Figure 5.6 shows a categorical variable – i.e. the different branches
form the different categories, Figure 5.6 is also an example of a multiple or compound bar chart
as there is more than one bar for each category.

5.5 General Rules for Graphical Presentation

 There are a number of general rules which must be borne in mind when planning and
using the graphical methods covered in this unit.
 Graphs and charts must be given clear but brief titles.

95
  The axes of graphs must be clearly labelled, and the scales of values clearly marked.
 Diagrams should be accompanied by the original data, or at least by a reference to the
source of the data.
 Avoid excessive detail, as this defeats the object of diagrams.
 Wherever necessary, guidelines should be inserted to facilitate reading.
 Try to include the origins of scales. Obeying this rule sometimes leads to rather a waste
of paper space.

CHAPTER 6: MEASURES OF LOCATION AND MEASURES OF DISPERSION

6.0 Introduction
This chapter mainly focuses on one of the objects of statistical analysis which is to condense
unwieldy data so as to make it more readily understood. The drawing of frequency curves

96
enables important general statement concerning statistics to be made. This can be taken further to
calculate some figure which will serve to indicate the general level of the variable under
discussion.
The single value which can be used to describe the general level of the variate is called a
“measure of location” or a “measure of central tendency”. There are three such measures with
which are going to be discussed in detail:
 The arithmetic mean
 The mode
 The median.

6.1 Objectives
By the end of this chapter students should be able to:

 Calculate the mean of grouped and ungrouped data

 Calculate the median of grouped and ungrouped data
 Ascertain the mode from given data
 Define and calculate Range from given information
 Use the formula to calculate Quartile deviation
 Calculate the Standard deviation for grouped and ungrouped data using the formula
 Calculate the Coefficient of variation
 for grouped and ungrouped data using the formula

6.2 The Arithmetic Mean

This is what we normally think of as the “average” of a set of values. It is obtained by adding together all
the values and then dividing the total by the number of values involved.
Take, for example, the following set of values which are the heights, in inches, of seven men:

Table 6.1: Height of seven men

Man Height(inches)
A 74
B 63

97
 C 64
D 71
E 71
F 66
G 74
Total 483

The arithmetic mean of these heights is 483 ÷ 7 = 69 inches. Notice that some values occur more
than once, but we still add them all. At this point we must introduce a little algebra. We don’t
always want to specify what particular items we are discussing (heights, egg weights, wages,
etc.) and so, for general discussion, we use, as you will recall from algebra, some general letter,
usually x. Also, we indicate the sum of a number of x’s by ∑ (sigma).
Thus, in our example, we may write:
∑x = 483

We shall be using “sigma notation” extensively in this unit, so make sure you understand the
meaning of the expression. We indicate the arithmetic mean by the symbol x (called “ x bar”) or
mew (called µ) and the number of items by the letter n. The calculation of the arithmetic mean
can be described by formula thus:
∑x 1
µ(mean) = or µ= ∑ x
n n
The latter expression is customary in statistical work. Applying it to the example above, we
have:

1
µ ( mean )= ( 483 )=¿69 inches
7

Arithmetic mean is often simply referred to as “the mean” when there is no chance of confusion
with other means (which we are not concerned with here).
6.1.1The Mean of a Simple Frequency Distribution

When there are many items (i.e. when n is large), the arithmetic can be eased somewhat by
forming a frequency distribution. Consider the following example.

98
Example 1
Table 6.2: Height distribution data

Indicating the frequency of each value by the letter f, you can see that ∑f = n and that, when the
x’s are not all the separate values but only the different ones, the formula becomes:
∑ fx 483
Mean = which is = 69 inches as before.
∑f 7
Of course, with only seven items it would not be necessary, in practice, to use this method, but if
we had a much larger number of items the method would save a lot of additions.

6.1.2 The Mean of a Grouped Frequency Distribution

Suppose now that you have a grouped frequency distribution. In this case, you will remember,
we do not know the actual individual values, only the groups in which they lie. We cannot
calculate the exact value of x , but we can make an approximation sufficiently accurate for most
statistical purposes. We do this by assuming that all the values in any group are equal to the mid-
point of that group. The procedure is very similar to that for a simple frequency distribution and
is shown in this example:

Table 6.3: Data for calculation of arithmetic mean of a grouped frequency distribution

99
 ∑ fx 1
Mean = = × 1 660= 33,2
∑f 50

Provided that ∑f is not less than about 50 and that the number of groups is not less than about 12,
the arithmetic mean thus calculated is sufficiently accurate for all practical purposes.
There is, though, one pitfall to be avoided when using this method – if all the groups should not
have the same class interval, be sure that you get the correct mid-values.

6.1.3 Characteristics of the Arithmetic Mean

 There are a number of characteristics of the arithmetic mean which you must know and
understand.
 It is not necessary to know the value of every item in order to calculate the arithmetic
mean.
 Only the total and the number of items are needed. For example, if you know the total
wages bill and the number of employees, you can calculate the arithmetic mean wage
without knowing the wages of each person.
 It is fully representative because it is based on all, and not just some, of the items in the
distribution.
 One or two extreme values can make the arithmetic mean somewhat unreal by their
influence on it. For example, if a millionaire came to live in a country village, the

100
 inclusion of his/her income in the arithmetic mean for the village might make the place
seem very much better off than it really was
 The arithmetic mean is reasonably easy to calculate and to understand.
 In more advanced statistical work it has the advantage of being amenable to algebraic
manipulation.

6.2 The Mode

The first alternative to the mean which we will discuss is the mode. This is the name given to the
most frequently occurring value.
6.2.1 Mode of a Simple Frequency Distribution
Consider the following frequency distribution:
Table 6.4: Accident distribution data

Number of accidents per Number of days with the

day (x) stated number of accidents
(f)

0 27
1 39
2 30
3 20
4 7
Total 123

In this case the most frequently occurring value is 1 (it occurred 39 times) and so the mode of
this distribution is 1. Note that the mode, like the mean, is a value of the variate, x, not the
frequency of that value. A common error is to say that the mode of the above distribution is 39.
This is wrong. The mode is 1.

For comparison, calculate the arithmetic mean of the distribution – it works out at 1.52.
The mode is used in those cases where it is essential for the measure of location to be an actually
occurring value.
101
An example is the case of a survey carried out by a clothing store to determine what size of
garment to stock in the greatest quantity. The average size of garment in demand might turn out
to be, let us say, 9, 3724, which is not an actually occurring value and doesn’t help us to answer
our problem. However, the mode of the distribution obtained from the survey would be an actual
value (perhaps size 8) and it would provide the answer to the problem.

6.2.2 Mode of a Grouped Frequency Distribution

When the data is given in the form of a grouped frequency distribution, it is not quite so easy to
determine the mode. What, you might ask, is the mode of the following distribution?

All we can really say is that “60 – 70” is the modal group (the group with the largest frequency).
Table 6.5: Data for determining the mode of a grouped frequency
distribution

Group Frequency

0 – 10 6
10 – 20 10
20 – 30 16
30 – 40 24
40 – 50 32
50 – 60 38
60 – 70 40
70 – 80 20
80 – 90 10
90 – 100 5
100 – 110 1
110 – 120 6

You may be tempted to say that the mode is 65, but this is not true, nor even a useful
approximation in most cases. The reason is that the modal group depends on the method of

102
grouping, which can be chosen quite arbitrarily to suit our convenience. The distribution could
have been set out with class intervals of five instead of 10, and would then have appeared as
follows (only the middle part is shown, to illustrate the point):

6.2.3 Characteristics of the Mode

 Some of the characteristics of the mode are worth noting, particularly as they compare
with those of the arithmetic mean.
 The mode is very easy to find with ungrouped distributions, since no calculation is
required.
 It can only be determined roughly with grouped distributions.
 It is not affected by the occurrence of extreme values.
 Unlike the arithmetic mean, it is not based on all the items in the distribution, but only on
those near its value.
 In ungrouped distributions the mode is an actually occurring value.
 It is not amenable to the algebraic manipulation needed in advanced statistical work.
 It is not unique, i.e. there can be more than one mode – for example, in the set of
numbers, 6, 7, 7, 7, 8, 8, 9, 10, 10, 10, 12, 13, there are two modes, namely 7 and 10. This
set of numbers would be referred to as having a bimodal distribution.
 The mode may not exist. For example, in the set of numbers 7, 8, 10, 11, 12, each number
occurs only once so this distribution has no mode.

6.3 The Median

The desirable feature of any measure of location is that it should be near the middle of the
distribution to which it refers. Now, if a value is near the middle of the distribution, then we
expect about half of the distribution to have larger values, and the other half to have smaller
values. This suggests to us that a possible measure of location might be that value which is such
that exactly half (i.e. 50%) of the distribution has larger values and exactly half has lower values.
The value which so divides the distribution into equal parts is called the median.

Look at the following set of values:

103
6, 7, 7, 8, 8, 9, 10, 10, 10, 12, 13 The total of these eleven numbers is 100 and the arithmetic
100
mean is therefore = 9, 091, while the mode is 10 because that is the number which occurs
11
most often (three times). The median, however, is 9 because there are five values above and five
values below 9.
Our first rule for determining the median is, therefore, as follows:
Arrange all the values in order of magnitude and the median is then the middle value.
Note that all the values are to be used – even though some of them may be repeated, they must
all be put separately into the list. In the example just dealt with, it was easy to pick out the
middle value because there was an odd number of values. But what if there is an even number?
Then, by convention, the median is taken to be the arithmetic mean of the two values in the
middle. For example, take the following set of values:
6, 7, 7, 8, 8, 9, 10, 10, 11, 12
The two values in the middle are 8 and 9, so the median is 8½.

6.3.1 Median of a Simple Frequency Distribution

Statistical data, of course, is rarely in such small groups and, as you have already learned, we
usually deal with frequency distributions. How, then, do we find the median if our data is in the
form of a distribution?
Let us take the example of the frequency distribution of accidents already used in discussing the
mode. The total number of values is 123 and so when those values are arranged in order of
magnitude, the median will be the 62nd item because that will be the middle item. To see what
the value of the 62nd item will be, let us draw up the distribution again. Table 6.6 repeats the
data from Table 6.4, but adds a column setting out the cumulative frequency.

104
 Table 6.6: Accident distribution data

It can now be seen from the last column that, if there were to be another list of all the separate
values in order, the first 27 would all be 0s and from then up to the 66th would be 1s. It follows,
therefore, that the 62nd item would be a 1 and that the median of this distribution is 1.

6.3.2: Median of a Grouped Frequency Distribution

The final problem connected with the median is how to find it when our data is in the form of a
grouped distribution. The solution to the problem, as you might expect, is very similar to the
solution for an ungrouped distribution – we halve the total frequency and then find, from the
cumulative frequency column, the corresponding value of the variate.
Because a grouped frequency distribution nearly always has a large total frequency, and because
we do not know the exact values of the items in each group, it is not necessary to find the two
middle items when the total frequency is even – just halve the total frequency and use the answer
(whether it is a whole number or not) for the subsequent calculation.

105
Table 6.7: Data for determining the median of a grouped frequency distribution

The total frequency is 206 and therefore the median is the 103rd item which, from the
cumulative frequency column, must lie in the 60 – 70 group. But exactly where in the 60-70
group? Well, there are 92 items before we get to that group and we need the 103rd item, so we
obviously need to move into that group by 11 items. Altogether in our 60 – 70 group there are 38
items, so we need to move 11/38 of the way into that group, that is 11/38 of 10 above 60. Our
median is therefore:
110
60 + = 60 + 2.89 = 62.89
38

6.3.3: Characteristics of the Median

Characteristic features of the median, which you should compare with those of the mean and the
mode, are as follows:
 It is fairly easily obtained in most cases, and is readily understood as being the “half-way
point”.
 It is less affected by extreme values than the mean. The millionaire in the country village
might alter considerably the mean income of the village but he would have almost no
effect at all on the median.

106
  It can be obtained without actually having all the values. If, for example, we want to
know the median height of a group of 21 men, we do not have to measure the height of
every single one; it is only necessary to stand the men in order of their heights and then
only the middle one (No.11) need be measured, for his height will be the median height.
The median is thus of value when we have open-ended classes at the edges of the
distribution as its calculation does not depend on the precise values of the variate in these
classes, whereas the value of the arithmetic mean does.
 The median is not very amenable to further algebraic manipulation.

6.4 Range
This is the simplest measure of dispersion; it is simply the difference between the largest and the
smallest.
Table 6.8: Data for determining the range of a grouped frequency distribution

In the example just given, we can see that the lowest weekly output for Factory A was 90 and the
highest was 107; the range is therefore 17. For Factory B the range is 156 – 36 = 120. The larger
range for Factory B shows that it performs less consistently than Factory A.
The advantage of the range as a measure of the dispersion of a distribution is that it is very easy
to calculate and its meaning is easy to understand. For these reasons it is used a great deal in
industrial quality control work. Its disadvantage is that it is based on only two of the individual
values and takes no account of all those in between.

107
As a result, one or two extreme results can make it quite unrepresentative. Consequently, the
range is not much used except in the case just mentioned.

6.5 The Quartile Deviation

This measure of dispersion is sometimes called the “semi-interquartile range”.
To understand it, you must cast your mind back to the method of obtaining the median from the
ogive. The median, you remember, is the value which divides the total frequency into two
halves. The values which divide the total frequency into quarters are called quartiles and they
can also be found from the ogive, as shown in Fig 6.1

Figure 9.1: Identifying quartiles from an ogive

You will notice that we have added the relative cumulative frequency scale to the right of the
graph. 100% corresponds to 206, i.e. the total frequency. It is then easy to read off the values of
the variate corresponding to 25%, 50% and 75% of the cumulative frequency, giving the lower
quartile (Q1), the median and the upper quartile (Q3) respectively.

Q1 = 46.5 Median = 63 Q3 = 76

108
The difference between the two quartiles is the interquartile range and half of the difference is
the semi-interquartile range or quartile deviation:
Quartile deviation = Q3 – Q1
2

76−46.5
=
2

= 14.75
206
Alternatively, you can work out: 25% of the total frequency, i.e. =¿ 51.5, and
4
75% of the total frequency, i.e. 154.5
and then read from the ogive the values of the variate corresponding to 51.5 and 154.5 on the
cumulative frequency scale (i.e. the left-hand scale). The end result is the same.

6.6 Standard Deviation

The most important of the measures of dispersion is the standard deviation. Except for the use of
the range in statistical quality control and the use of the quartile deviation in wages statistics, the
standard deviation is used almost exclusively in statistical practice.
The standard deviation is defined as the square root of the variance and so we need to know
how to calculate the variance first.
6.6.1 The Variance
We start by finding the deviations from the mean, and then squaring them, which removes the
negative signs in a mathematically acceptable fashion. The variance is then defined as the mean
of the deviations from the mean, squared:
Variance = (xi – x )2
n where n is the total frequency.
Consider the following example.

109
Table 6.9: Output from factory a over 10 weeks

Variance = (xi – x )2
n

228.50
=
10
= 22.85

Standard Deviation(S.D) = again where n is the total frequency.

In this example, then:

SD = √ 22.85= 4.78.
The symbol usually used to denote standard deviation is “ ” (theta), although you may
sometimes find “s” or “sd” used.

6.6.2 Standard Deviation of a Simple Frequency Distribution

If the data in Table 9.3 had been given as a frequency distribution (as is often the case), then only
the different values would appear in the “x” column and we would have to remember to multiply

110
each result by its frequency.
This is shown in Table 6.10
Table 6.10: Determining the standard deviation of a simple frequency distribution

The standard deviation is then worked out in the same way as previously, as follows:

Standard Deviation(S.D) =

=
√ 228.5
10
= √ 22.85 (the variance)
= 4.78.
6.6.3 Characteristics of the Standard Deviation
In spite of the apparently complicated method of calculation, the standard deviation is the
measure of dispersion used in all but the very simplest of statistical studies. It is based on all of
the individual items, it gives slightly more emphasis to the larger deviations but does not ignore
the smaller ones and, most important, it can be treated mathematically in more advanced
statistics.

111
6.7 The Coefficient of Variation
Suppose that we are comparing the profits earned by two businesses. One of them may be a
fairly large business with average monthly profits of £50,000, while the other may be a small
firm with average monthly profits of only £2,000. Clearly, the general level of profits is very
different in the two cases, but what about the month-by-month variability? We can compare the
two firms as to their variability by calculating the two standard deviations.
Let us suppose that both standard deviations come to £500. Now, £500 is a much more
significant amount in relation to the small firm than it is in relation to the large firm so that,
although they have the same standard deviations, it would be unrealistic to say that the two
businesses are equally consistent in their month-to-month earnings of profits.
To overcome this difficulty, we can express the SD as a percentage of the mean in each case. We
call the result the “coefficient of variation”.
Applying the idea to the figures which we have just quoted, we get coefficients of variation
(usually indicated in formulae by V or CV) as follows:
500
For the large firm: V = ×100 = 1.0%
50000

500
For the small firm: V = ×100 = 25.0%
2000
This shows that, relatively speaking, the small firm is more erratic in its earnings than the large
firm.Note that although a standard deviation has the same units as the variate, the coefficient of
variation is a ratio and thus has no units.
The coefficient of variation is calculated by expressing the standard deviation as a percentage of
the mean:
S. D
Coefficient of variation (CV) = ×100
mean
By using the coefficient of variation you can compare dispersions of various distributions, such
as heights measured in cm with a distribution of weights measured in kg.
Another application of the coefficient of variation comes when we try to compare distributions
the data of which are in different units – for example, when we try to compare a French business
with an American business.

112
To avoid the trouble of converting the dollars to francs (or vice versa) we can calculate the
coefficients of variation in each case and thus obtain comparable measures of dispersion.

CHAPTER 7: PROBABILITY

7.0 Introduction
“Probability” is one of those ideas about which we all have some notion but which are not very
definite. Initially, we will not spend our time trying to get an exact definition, but will confine
ourselves to the task of grasping the idea generally and seeing how it can be used. Other words
which convey much the same idea are “chance” and “likelihood”. Just as there is a scale of, say,
temperature, because some things are hotter than others, so there is a scale of probability because
some things are probable than others. Snow is more likely to fall in winter than in summer; a
healthy person has more chance of surviving an attack of influenza than an unhealthy person.

There is, note, some uncertainty in these matters. Most things in real life are uncertain to some
degree or other, and it is for this reason that the theory of probability is of great practical value.
It is the branch of mathematics which deals specifically with matters of uncertainty. For the
purpose of learning the theory, it is necessary to start with simple things like coin-tossing and
dice-throwing, which may seem a bit remote from business and industrial life, but which will
help you understand the more practical applications.

7.1 Objectives
By the end of this chapter students should be able to:

 Understand the basic concepts of probability and probability distributions, the basic
‘rules’ of probability, expected values and the use of probability and decision trees,
Types of events, Conditional probability, Tree diagrams and Estimate Probabilities

7.2 Estimating Probabilities

Suppose someone tells you “there is a 50-50 chance that we will be able to deliver your order on
Friday”. This statement means something intuitively, even though when Friday arrives there are
only two outcomes. Either the order will be delivered or it will not. Statements like this are
trying to put probabilities or chances on uncertain events.

113
Probability is measured on a scale between 0 and 1. Any event which is impossible has a
probability of 0, and any event which is certain to occur has a probability of 1.

For example, the probability that the sun will not rise tomorrow is 0; the probability that a light
bulb will fail sooner or later is 1. For uncertain events, the probability of occurrence is
somewhere between 0 and 1. The 50-50 chance mentioned above is equivalent to a probability of
0.5.

Try to estimate probabilities for the following events. Remember that events which are more
likely to occur than not have probabilities which are greater than 0.5, and the more certain they
are the closer the probabilities are to 1.

Similarly, events which are more likely not to occur have probabilities which are less than 0.5.
The probabilities get closer to 0 as the events get more unlikely.

(a) The probability that a coin will fall heads when tossed.
(b) The probability that it will snow next Christmas.
(c) The probability that sales for your company will reach record levels next year.
(d) The probability that your car will not break down on your next journey.
(e) The probability that the throw of a die will show a six.

The probabilities are as follows:

(a) The probability of heads is one in two or 0.5.

(b) This probability is quite low. It is somewhere between 0 and 0.1.
(c) You can answer this one yourself.
(d) This depends on how frequently your car is serviced. For a reliable car it should be
greater than 0.5.
(e) The probability of a six is one in six or 61 or 0.167.

7.2.1 Theoretical Probabilities

Sometimes probabilities can be specified by considering the physical aspects of the situation.

For example, consider the tossing of a coin. What is the probability that it will fall heads? There
are two sides to a coin. There is no reason to favour either side as a coin is symmetrical.

114
Therefore, the probability of heads, which we call P(H) is:

P(H) = 0.5

Another example is throwing a die. A die has six sides. Again, assuming it is not weighted in
favour of any of the sides, there is no reason to favour one side rather than another. Therefore,
the probability of a six showing uppermost, P (6), is:

1
P (6) = = 0.167
6

As a third and final example, imagine a box containing 100 beads of which 23 are black and 77
white.

If we pick one bead out of the box at random (blindfold and with the box well shaken up), what
is the probability that we will draw a black bead? We have 23 chances out of 100, so the
probability is:

23
P (B) = = 0.23
100

Probabilities of this kind, where we can assess them from our prior knowledge of the situation,
are also called “a priori” probabilities.

In general terms, we can say that if an event E can happen in h ways out of a total of n possible
equally likely ways, then the probability of that event occurring (called a success) is given by:

Number of possible E occuring h

P (E) = =
Total number of possible outcomes n

7.2.2 Empirical Probabilities

Often it is not possible to give a theoretical probability of an event.

For example, what is the probability that an item on a production line will fail a quality control
test?

This question can be answered either by measuring the probability in a test situation (i.e.
empirically) or by relying on previous results. If 100 items are taken from the production line

115
and tested, then:

Total No . of items which fail

Probability of failure, P(F) =
Total No . of itemstested

So, if 5 items actually fail the test

5
P(F) = = 0.05
100

Sometimes it is not possible to set up an experiment to calculate an empirical probability. For

example, what are your chances of passing a particular examination? You cannot sit a series of
examinations to answer this. Previous results must be used. If you have taken 12 examinations in
the past, and failed only one, you might estimate:

11
Probability of passing, P (Pass) = = 0.92
12

7.3 Types of Event

In probability, we can identify five types of event:

 Mutually exclusive
 Non-mutually-exclusive
 Independent
 Dependent or non-independent
 Complementary.

7.3.1 Mutually exclusive events

If two events are mutually exclusive then the occurrence of one event precludes the possibility of
the other occurring.

For example, the two sides of a coin are mutually exclusive since, on the throw of the coin,
“heads” automatically rules out the possibility of “tails”. On the throw of a die, a six excludes all
other possibilities. In fact, all the sides of a die are mutually exclusive; the occurrence of any one
of them as the top face automatically excludes any of the others.

7.3.2 Non-mutually-exclusive events

116
These are events which can occur together. For example, in a pack of playing cards hearts and
queens are non-mutually-exclusive since there is one card, the queen of hearts, which is both a
heart and a queen and so satisfies both criteria for success.

7.3.3 Independent events

These are events which are not mutually exclusive and where the occurrence of one event does
not affect the occurrence of the other. For example, the tossing of a coin in no way affects the
result of the next toss of the coin; each toss has an independent outcome.

7.3.4 Dependent or non-independent events

These are situations where the outcome of one event is dependent on another event. For example,
the probability of a car owner being able to drive to work in his car is dependent on him being
able to start the car. The probability of him being able to drive to work given that the car starts is
a conditional probability. We can express this as:

P(Drive to work|Car starts)

where: the vertical line is a shorthand way of writing “given that”.

7.3.5 Complementary events

An event either occurs or it does not occur, i.e. we are certain that one or other of these situations
holds. For example, if we throw a die and denote the event where a six is uppermost by A, and
the event where a one, two, three, four or five is uppermost by A (or not A), then A and A are
complementary, i.e. they are mutually exclusive with a total probability of 1.

Thus: P(A) + P(A ) = 1

This relationship between complementary events is useful as it is often easier to find the
probability of an event not occurring than to find the probability that it does occur. Using the
above formula, we can always find P(A) by subtracting P(A ) from 1.

7.4 Conditional Probability

The probability of an event A occurring where that event is conditional upon event B having also
occurred is expressed as:

117
 P(A|B)

The events A and B must be causally linked in some way for A to be conditional upon B. For
example, we noted earlier the case where a car owner’s ability to drive to work in his car
(event A) is dependent on him being able to start the car (event B). There is self evidently a
causal link between the two events.
However, if we consider the case him being able to drive to work given that he is married, there
is no necessary link between the two events – and there is no conditional probability.
In a case involving equally likely outcomes for both events (i.e. both events A and B may or may
not occur), the conditional probability of event A occurring, given that B also occurs, is
calculated by the following formula:
n( A∧B)
P(A|B) = where n = the number of possible outcomes.
n(B)
One approach to determining probability in such circumstances is to construct a table of the
possible outcomes – sometimes called a contingency table.

Consider the case of 100 candidates attempting their driving test for the first time. 80 of the
candidates pass and 50 of them have had 10 or more lessons. Of those who have had 10 or more
lessons, 45 of them passed. What is the probability of passing at the first attempt if you have had
only 6 lessons?
We can construct a table which identifies the possible outcomes as follows:

Table 7.1: Contingency Table

Make sure you understand the construction of this table:

 We have listed the possible outcomes of event A along the top – these are either to have
passed or failed the test. Thus, the columns will show the number of outcomes for either

118
 possibility.
 We have listed the possible outcomes of event B along the side – these are either to have
had 10 or more lessons, or less than 10 lessons. Thus, the rows will show the number of
outcomes for either possibility.
 We have entered in the information that we know – that there are a total of 100 possible
outcomes, that the total number of outcomes in which event A was “passed” is 80, that
the total number of outcomes in which event B is “had 10 or more lessons” is 50, and that
the total number of outcomes in which event A was “passed” and event B was “had 10 or
more lessons” is 45.
We can complete the rest of the table by subtraction as follows:
Table 7.2: Contingency Outcomes Table

We can now work out the total outcomes applicable to the question “what is the probability of
passing at the first attempt if you have had only 6 lessons?”.
Remember that event A is “passed” and event B is “having had less than 10 lessons”. Therefore:
 The total number of outcomes of B = 50
 The total number of outcomes of both A and B = 35
Thus the probability is:
n( A∧B) 35
P(A|B) = = = 0.7
n(B) 50
We could consider the question “what is the probability of failing at the first attempt if you have
had more than 10 lessons?”. Here event A is “failed” and event B is “having had more than 10
lessons”.
The calculation is:
n( A∧B) 5
P(A|B) = = =¿ 0.1
n(B) 50
See if you can work out the answer to the following questions using the above table:
What is the probability of failing at the first attempt if you have only had 8 lessons?

119
Remember to be clear about which is event A and event B, then read off the total number of
outcomes for event B and for event A and B together, and then apply the formula.
Event A is “failed” and event B is “having less than 10 lessons”. The calculation then is:
n( A∧B) 15
P(A|B) = = = 0.3
n(B) 50

7.4 Tree Diagrams

A compound experiment, i.e. one with more than one component part, may be regarded as a
sequence of similar experiments. For example, the rolling of two dice can be considered as the
rolling of one followed by the rolling of the other; and the tossing of four coins can be thought of
as tossing one after the other. A tree diagram enables us to construct an exhaustive list of
mutually exclusive outcomes of a compound experiment.

Furthermore, a tree diagram gives us a pictorial representation of probability.

 By exhaustive, we mean that every possible outcome is considered.
 By mutually exclusive we mean, as before, that if one of the outcomes of the compound
experiment occurs then the others cannot.

In the following examples, we shall consider the implications of conditional probability – the
probability of one event occurring if another event has also occurred.

Example 1
The concept can be illustrated using the example of a bag containing five red and three white
billiard balls. If two are selected at random without replacement, what is the probability that one
of each colour is drawn?
Let: R indicate a red ball being selected
W indicate a white ball being selected

When the first ball is selected, the probabilities are:

5 3
P(R) = P(W) =
8 8

120
When the second ball is selected, there are only seven balls left and the mix of red and white
balls will be determined by the selection of the first ball – i.e. the probability of a red or a white
ball being selected is conditional upon the previous event.
Thus:
If the first ball selected was red, there will be four red and three white balls left. The probabilities
for the selection of the second ball are then:
4 3
P(R) = and P(W) =
7 7
If the first ball selected was white, there will be five red and two white balls left. The
probabilities for the selection of the second ball are then:
5 2
P(R) = and P(W) =
7 7
This process of working out the different conditional probabilities can be very complicated and it
is easier to represent the situation by means of a tree diagram as in Figure 11.1. The probabilities
at each stage are shown alongside the branches of the tree.

Figure 7.1: Example 1 – Tree diagram

The diagram is constructed as follows, working from left to right.

 At the start we take a ball from the bag. This ball is either red or white so we draw two
branches labelled R and W, corresponding to the two possibilities. We then also write on

121
 the branch the probability of the outcome of this simple experiment being along that
branch.
 We then consider drawing a second ball from the bag. Whether we draw a red or a white
ball the first time, we can still draw a red or a white ball the second time, so we mark in
the two possibilities at the end of each of the two branches of our existing tree diagram.
We enter on these second branches the conditional probabilities associated with them.
Thus, on the uppermost branch in the diagram we must insert the probability of obtaining
a second red ball given that the first was red.

Each complete branch from start to tip represents one possible outcome of the compound
experiment and each of the branches is mutually exclusive. We can see that there are four
different mutually exclusive outcomes possible, namely RR, RW, WR and WW.

To obtain the probability of a particular outcome of the compound experiment occurring, we

multiply the probabilities along the different sections of the branch, using the general
multiplication law for probabilities. We thus obtain the probabilities shown in Table 11.1. The
sum of the probabilities should add up to 1, as we know one or other of these mutually exclusive
outcomes is certain to happen.

Table 7.3: Example 1 – Probabilities of outcomes from compound (conditional) events

122
Example 2
A bag contains three red balls, two white balls and one blue ball. Two balls are drawn at random
(without replacement). Find the probability that:
(a) Both white balls are drawn.
(b) The blue ball is not drawn.
(c) A red then a white are drawn.
(d) A red and a white are drawn.
To solve this problem, let us build up a tree diagram.
Stage 1 will be to consider the situation when the first ball is drawn:
Figure 7.2: Example 2 – Tree diagram of first event

We have given the first ball drawn a subscript of 1 – for example, red first = R 1. We shall give
the second ball drawn a subscript of 2.

The probabilities in the first stage will, then, be:

No . of red balls 3
P(R1) = =
Total no . of balls 6

123
 2
P(W1) =
6

1
(P(B1) =
6
The possibilities in stage 2 may now be mapped on the tree diagram. When the second ball is
drawn, the probability of it being red, white or blue is conditional on the outcome of the first
event. Thus, note there was only one blue ball in the bag, so if we picked a blue ball first then we
can have only a red or a white second ball. Also, whatever colour is chosen first, there are only
five balls left as we do not have replacement.

Figure 7.3: Example 2 – Tree diagram of first and second events

We can now list all the possible outcomes, with their associated probabilities.

It is possible to read off the probabilities we require from Table 7.4.

124
Table 7.4: Example 2 – Probabilities of outcomes from compound (conditional) events

(a) Probability that both white balls are drawn:

1
P(W1W2) =
15
(b) Probability the blue ball is not drawn:
1 1 1 1 2
P(R1R2) + P(R1W2) + P(W1R2) + P(W1W2) = + + + =
5 5 5 15 3

(c) Probability that a red then a white are drawn:

1
P(R1W2) =
5

(d) Probability that a red and a white are drawn:

125
 1 1 2
P(R1W2) + P(W1R2) = + =
5 5 5

126
 CHAPTER 8: TIME SERIES

8.0 Introduction
Businesses and governments use statistical analysis of information collected at regular intervals
over extensive periods of time to plan future policies. For example, sales values or
unemployment levels recorded at yearly, quarterly or monthly intervals are examined in an
attempt to predict their future behaviour. Such sets of values observed at regular intervals over a
period of time are called time series.
The analysis of this data is a complex problem as many variable factors may influence the
changes which take place. The first step in analysing the data is to plot the observations on a
scattergram, with time evenly spaced across the x axis and measures of the dependent variable
forming the y axis. This can give us a good visual guide to the actual changes, but is very little
help in showing the component factors causing these changes or in predicting future movements
of the dependent variable.
Statisticians have, therefore, constructed a number of models to describe the behaviour of time
series. These assume that changes over time in the variable being studied are caused by the
variation of four main factors. This gives rise to a number of approaches to the analysis of the
inter-relationships between these factors.

8.1 Objectives
By the end of the topic students should be able to:
Demonstrate how time-series analysis can be used in business forecasting. This includes the use
of the additive and multiplicative models to ‘decompose’ time-series data, the calculation of
trends and cyclical and seasonal patterns, and simple forecasting.

8.2 Structure of a Time Series

Consider a factory employing a number of people in producing a particular commodity, say
thermometers. Naturally, at such a factory during the course of a year some employees will be
absent for various reasons. The following table shows the number of days lost through sickness
over the last five years. Each year has been broken down into four quarters of three months. We
have assumed that the number of employees at the factory remained constant over the five years.

127
Table 8.1: Days Lost Through Sickness at a Thermometer Factory

8.2.1 The Scattergram

We will begin by plotting the scattergram for the data, as shown in Figure 8.1 on the next page.
The scattergram of a time series is often called a historigram. (Do not confuse this with a
histogram, which is a type of bar chart.) Note the following characteristics of a historigram:
 It is usual to join the points by straight lines. The only function of these lines is to help
your eyes to see the pattern formed by the points.
 Intermediate values of the variables cannot be read from the historigram.
 A historigram is simpler than other scattergrams since no time value can have more than
one corresponding value of the dependent variable.
 It is possible to change the scale of the y axis to highlight smaller changes.

128
Every historigram will look similar to this, depending on the scale of the y axis, but a careful
study of the change of pattern over time will suggest which model should be used for analysis.
Figure 8.1: Scattergram of days lost through sickness (1996 – 1999)

There are four factors that influence the changes in a time series – trend, seasonal variations,
cyclical fluctuations, and irregular or random fluctuations.

8.2.2Trend
This is the change in general level over the whole time period and is often referred to as the
secular trend. You can see in Figure 10.1 that the trend is definitely upwards, in spite of the
obvious fluctuations from one quarter to the next.

A trend can thus be defined as a clear tendency for the time series data to travel in a particular
direction in spite of other large and small fluctuations.

An example of a linear trend is shown in Figure 8.2. There are numerous instances of a trend –
for example, the amount of money collected from taxpayers is always increasing and, therefore,
any time series describing government income from tax would show an upward trend.

129
Figure 8.2: Example of a linear trend line

8.2.3 Seasonal Variations

These are variations which are repeated over relatively short periods of time. Those most
frequently observed are associated with the seasons of the year – for example, ice-cream sales
tend to rise during the summer months and fall during the winter months. You can see in our
example of employees’ sickness that more people are sick during the winter than in the summer.

If you can establish a pattern to the variation throughout the year, then this seasonal variation is
likely to be similar from one year to the next. Thus, it would be possible to allow for it when
estimating values of the variable in other parts of the time series. The usefulness of being able to
calculate seasonal variation is obvious as, for example, it allows ice-cream manufacturers to alter
their production schedules to meet these seasonal changes.
Figure 8.3 shows a typical seasonal variation that could apply to the examples above.
Figure 8.3: Example of seasonal variation

130
8.2.4 Cyclical Fluctuations
These are long-term, but fairly regular variations in the pattern of the variable. They are difficult
to observe unless you have access to data over an extensive period of time during which external
conditions have remained relatively constant. For example, it is well known in the textile trade
that there is a cycle of about three years, during which time demand varies from high to low.
This is similar to the phenomena known as the trade cycle which many economists say exists in
the trading pattern of most countries, but for which there is no generally accepted explanation. It
is also thought that weather patterns may be cyclical in nature over long periods.

Figure 8.4 shows how such a cyclical fluctuation would relate to an upward trend. In our
example on sickness, a cyclical fluctuation could be caused by, say, a two-year cycle for people
suffering from influenza.

Figure 8.4: Example of a cyclical fluctuation

131
As this type of fluctuation is difficult to determine, it is often considered with the final (fourth)
element, and the two together are called the residual variation.

8.2.5 Irregular or Random Fluctuations

Careful examination of Figure 8.1 shows that there are other relatively small irregularities which
we have not accounted for and which do not seem to have any easily seen pattern. We call these
irregular or random fluctuations and they may be due to errors of observation or to some one-off
external influence which is difficult to isolate or predict. In our example there may have been a
measles epidemic in 1998, but it would be extremely difficult to predict when and if such an
epidemic would occur again.

8.3 Additive Model of Time Series Analysis

To sum up, then, a time series (Y) can be considered as a combination of the following four
factors:
 Trend (T)
 Seasonal variation (S)
 Cyclical fluctuation (C)

132
  Irregular fluctuations (I)
It is possible for the relationship between these factors and the time series to be expressed in a
number of ways through the use of different mathematical models. Here, we shall consider in
detail the additive model.
The additive model, as its name suggests, can be expressed by the equation:
Series = Trend + Seasonal variation + Cyclical fluctuations + Random fluctuations
i.e. Y=T+S+C+I

As we noted, the cyclical and random fluctuations are often put together and called the “residual”
(R), so we get:
Y=T+S+R
We shall only be concerned here with the trend, the other components being outside the scope of
our studies at this time.
8.3.1 Trend
This is the most important factor of a time series.
Before deciding on the method to be used in finding it, we must decide whether the conditions
that have influenced the series have remained stable over time.
For example, if you have to consider the production of some commodity and want to establish
the trend, you should first decide if there has` been any significant change in conditions affecting
the level of production, such as a sudden and considerable growth in the national economy. If
there has, you must consider breaking the time series into sections over which the conditions
have remained stable.
Having decided the time period you will analyse, you can use any one of the following methods
to find the trend. The basic idea behind most of these methods is to average out the three other
factors of variation so that you are left with the long-term trend.

(a) Graphical Method

Once you have plotted the historigram of the time series, it is possible to draw in by eye a line
through the points to represent the trend. The result is likely to vary considerably from person to
person, unless the plotted points lie very near to a straight line, so it is not a satisfactory method.

133
(b) Semi-Averages Method
This is a simple method which involves very little arithmetic. The time period is divided into
equal parts, and the arithmetic means of the values of the dependent variable in each half are
calculated. These means are then plotted at the quarter and three-quarters position of the time
series. The line adjoining these two points represents the trend of the series. Note that this line
will pass through the overall mean of the values of the dependent variable.

To calculate the mean of the first half of the time series, we need to divide the total of the values
of the variable over that period by the number of individual time periods covered. In our example
of days lost through sickness, the total time period covered is five years. The midpoint of the
whole series is, then, mid-way between quarter 2 and quarter 3 of 1997.

Taking the data for this first half of the series, we get:
Table 8.2: Days lost

134
To calculate the mean of the second half of the period, we need to consider the data from the
midpoint onwards:

Table 8.3: Sick Leave Days

These values are plotted on the historigram in Figure 8.5. You will notice that 30.3 days, as it is
the mean for the first half, is plotted halfway between quarters 1 and 2 of 1996, and likewise 44.2
days is plotted halfway between quarters 3 and 4 of 1998. The trend line is then drawn between
these two points and it can be extrapolated beyond these points as shown by the dotted line.

If there is an odd number of observations in the time series, the middle observation is ignored
and the means of the observations on each side of it are calculated.

Figure 8.5: Trend line based on semi-averages method

135
(c) Moving Averages Method
So far, the methods we have discussed for finding trends have resulted in a straight line, but the
actual trend may be a curve or a series of straight segments. The method of moving averages
gives a way of calculating and plotting on the historigram a trend point corresponding to each
observed point. These points are calculated by averaging a number of consecutive values of the
dependent variable so that variations in individual observations are reduced.
The number of consecutive values selected will depend on the length of the short-term or
seasonal variation shown on the historigram.

The method of calculating a set of moving averages is illustrated by the following simple
example. Consider a time series comprising the seven numbers 6, 4, 5, 1, 9, 5, 6. If we take the
number of time periods covered by the seasonal variations to be four (as in quarterly figures over
each year), then a “moving average of order four” is needed. The calculation then proceeds as
follows.

 Step 1: Find the average of the first to fourth numbers in the series:

136
 6+ 4+5+1
Average =4
4
 Step 2: Find the average of the second to fifth numbers in the series:
4+ 5+1+9
Average = =¿ 4.75
4
 Step 3: Find the average of the third to sixth numbers in the series:
5+1+9+5
Average = =¿ 5
4
 Step 4: Find the average of the fourth to seventh numbers in the series:
1+ 9+5+6
Average = =¿5.25
4
(If the series was longer, we could continue taking the average of the each successive set of four
numbers in the series.) Hence, in our simple example, the moving averages of order 4 are 4, 4.75,
5, 5.25, and these could be plotted on the historigram.

We selected a moving average of order 4 here since the data was quarterly. If the data was
monthly, a moving average of order 12 would be needed, and for daily data, the order would be
7, and so on. Returning now to our earlier example of days lost through sickness, we can
calculate the trend values and plot them on Figure 8.6. A moving average of order 4 will again be
used since the data is quarterly.
Notice how the table of calculations is set out, with the numbers in columns (4) and (5) placed
midway between the four quarterly readings to which they relate. This is because we are
averaging over an even number of values, so the moving average would have to be plotted in this
position on the historigram and would not correspond to any particular quarter.
This makes it necessary to add column (6) which gives the mean of successive pairs of moving
averages and these numbers are the trend values plotted in Figure 8.6 against particular quarters.
(The values in column (6) are often called the centred moving averages.) The trend values are
given correct to one decimal place as this is the greatest level of accuracy justified by the
accuracy of the data.
If we were calculating a moving average with an odd number of values, it would not be
necessary to carry out this final stage as the moving averages would be centred on an actual
observation and so would be the trend values.

137
The table of calculations is as follows.
Table 8.4: Calculation table for moving averages method of determining trend

Moving average trend line

The main advantage of the moving averages method is that the trend values take into account the
immediate changes in external factors which the trend line using the semi averages method is
unable to do.

Figure 8.6: Moving average trend line

138
However, this method has three disadvantages:
 The trend line cannot be found for the whole of the time series. As you can see from our
example, there are no trend values for quarters at the beginning and end of the series.
 Problems can be encountered in deciding the order number, i.e. the period of fluctuation.
 Unless the seasonal or cyclical movement is definite and clear cut, the moving method of
deriving the trend may yield a rather unsatisfactory line.
 Since the trend is calculated as a simple arithmetic mean it can be unduly influenced by a
few extreme values.

8.4 Forecasting
The reason for isolating the trend within a time series is to be able to make a prediction of its
future values and thus estimate the movement of the time series.
In considering forecasting, there are two key assumptions which must be made at the outset.

8.4.1That conditions remain stable

139
Those conditions and factors which were apparent during the period over which the trend was
calculated must be assumed to be unchanged over the period for which the forecast is made. If
they do change, then the trend is likely to change with them, thus making any predictions
inaccurate. For example, forecasts of savings trends based on given interest rates will not be
correct if there is a sudden change either up or down in those rates.

8.4.2 That extra factors will not arise

It is sometimes the case that, when trends are predicted beyond the limits of the data from which
they are calculated, extra factors will arise which influence the trend. For example, there is a
limit to the number of washing machines that can be sold within a country. This capacity is a
factor that must be considered when making projections of the future sales of washing machines.
Therefore, in forecasting from a time series, it must be assumed that such extra factors will not
arise. From the methods of defining trend considered in this unit, the moving averages method is
the one used in forecasting... Note that it is primarily concerned with short-term forecasts
because the assumptions mentioned previously will break down gradually for periods of longer
than about a year.

The method involves extending the moving average trend line drawn on the historigram of the
time series. The trend line is extended by assuming that the gradient remains the same as that
calculated from the data. The further forward you extend it, the more unreliable becomes the
forecast.

Although fairly easy to calculate, this forecast must be treated with caution because it is based on
the value of the trend calculated for the last period for which definitive data is available – if this
happens to be an especially high or low value then it would influence the trend, and thus the
forecast, considerably.

140
 REFERENCES
Beck, S. E. and Manuel K. (2007). Practical Research Methods for Librarians and Information
Professionals. New York: Neal-Schuman

Dunteman G.H and Moon-Ho R. (2009). Introduction to Generalized Linear Models. Thousand
Oaks, CA Sage Publications.

Finkelstein M. O (2009) Basic Concepts of Probability and Statistics in the Law. New York,
NY: Springer.

Glyn B. Carrol G and Wall S. (2002). Quantitative Methods for business and economics.
Prentice Hall.

Gorard S. (2003). Quantitative methods in social science. New York: Continuum.

Osborne J. W. (2008). Best practices in quantitative methods. Thousand Oaks, Calif: Sage
Publications.

141