Problem Set 3

Normal Distribution and Sampling

1 New product sales

The monthly sales demand for a new product is uncertain, but it is considered to be adequately
described by a normal random variable with mean 50,000 units and variance 100,000,000.

a) A factory to manufacture the new product has been constructed with enough capacity to
meet sales demand 90% of the months. How much capacity does the factory have?

b) The accounting department has indicated that there is a 27% chance that the new product
will not generate enough monthly sales volume to make a profit. What is the breakeven sales
level per month?

c) What is the smallest interval for the observed sales next month that has a 0.9 probability of
occurring?

2 Receivable accounts
From past experience, an auditor knows that the dollar value of the accounts receivable for the
ABC Corporation, denoted by the random variable X, has a normal distribution. Unfortunately,
she has forgotten the mean and variance of the accounts receivable distribution. One of her staff
members has informed her that the following probability statements are true: P (X < 5, 000) = 0.25
and P (X > 7, 000) = 0.25.

a) What are the expected value and standard deviation of the accounts receivable?

b) What is the probability that one account drawn at random will have a dollar value equal to
8,500?

c) What is the probability that one account drawn at random will have a dollar value between
5,500 and 5,800?

3 Investment purchase
Suppose that you have $5000 and you are contemplating the purchase of two investments, IBM
and Walgreen’s. One year from now, IBM can be sold for $X per dollar invested, and Walgreen’s
can be sold for $Y per dollar invested. You regard X and Y as statistically independent random
variables with the following distributions: X ∼ N (1.10, 0.01) and Y ∼ N (1.10, 0.01).

a) If you put all of your money in IBM, what is the probability you will be able to sell it in one
year at a positive net profit?

b) If you split your money evenly between the two investments, what is the probability you will
be able to sell them both in a year and have a positive net profit?

This study source was downloaded by 100000892943181 from CourseHero.com on 11-07-2024 07:16:57 GMT -06:00

https://www.coursehero.com/file/237551861/PS3pdf/
 4 Screw diameters
Wheeler Machining produces screws whose diameters are normally distributed with mean 5 cm and
standard deviation 0.1 cm. In a batch of 100 screws, how many would be expected to be outside
the range [4.85 cm, 5.15 cm]?

5 Damage estimation
Dr. Smith is involved in an automobile accident. To collect his insurance, he is required to obtain
three estimates of the amount of damage. If the estimates he would obtain from the available
automobile repair shops are independent and each is normally distributed with mean $450 and
standard deviation $50, and if he chooses three of these shops randomly, what is the probability
that the lowest estimate is greater than $400?

6 Speed limit distribution

It is commonly known that many, if not most, of the drivers on interstate highways do not obey
the 55-mph speed limit. Suppose that the actual speeds driven by drivers are normally distributed
with mean µ and standard deviation 5 mph. (Each of the parts below is separate from the other
parts.)

a) If 8% of all drivers are clocked at 65 mph or more, what is the mean µ?

b) If only 2% of all drivers are clocked at 50 mph or less, what is the mean µ?

c) Suppose that µ and σ are both unknown, and it is observed that 2% of all drivers go slower
than 50 mph and 8% of all drivers go faster than 65 mph. What must µ and σ be?

7 Milk sales
The number of gallons of milk sold in any given week at a particular grocery store has a normal
distribution with mean 4,000 and variance 90,000. Furthermore, this distribution is the same at
all stores operated by a particular chain, and the milk sales at any one store in the chain are
independent of the milk sales at any of the other members of the chain. The chain operates in
Raleigh, Winston-Salem, Charlotte, and Wilmington with 9 stores in each city.

a) For a given week, find the probability that a particular store sells at least 4100 gallons of
milk.

b) For a given week, find the probability that the average number of sales per store in Raleigh
is at least 4,100 gallons of milk.

c) Find the probability that the average number of sales per store per week for the entire chain
of stores is at least 4100 gallons of milk.

This study source was downloaded by 100000892943181 from CourseHero.com Page 2

on 11-07-2024 07:16:57 GMT -06:00

https://www.coursehero.com/file/237551861/PS3pdf/
 8 Candy bar distribution
The number of candy bars sold from a vending machine on any given day is uniformly distributed
with mean 258 and standard deviation 60, and sales on one day are independent of sales on other
days. Consider a period of 144 days.

a) What is the probability that the sample mean number of candy bars sold for the 144-day
period is greater than 263?

b) What is the probability that the total number of candy bars sold for the 144-day period is
greater than 36,000 but less than 38,000?

c) If the profit per candy bar is 5 cents, what is the probability that the average profit per day
over the 144-day period is at least $13?

9 The manufacturing process at National Cookie Company I

(Adapted from Schleifer and Bell, Data Analysis, Regression and Forecasting.) National Cookie
Company produces premium chocolate chip cookies for sale in up-scale food markets. Cookies are
sold in 250 gram packages of 10 cookies. Unfortunately, the manufacturing process has some inher-
ent variation. After years of improving the process, National has reduced the standard deviation
of the process to 0.6 grams per cookie. In the short term, the variation of the production process
is outside National’s control. However, National is able to adjust the mean weight level for each
cookie. For various economic reasons, setting the mean level properly is important. If it is too
high, then the cookies are heavier than required and National must incur unnecessarily high raw
material costs; if the mean level is too low, then the cookies must be sold as thrift.

1. Assume that National sets the maximum number of underweight packages at 2.5%. Where
should National set the mean production level per cookie?

2. Without carrying out any calculations, describe how National should determine the optimal
number of underweight packages. It might be helpful to assume the following concrete num-
bers: raw material costs are $0.12 cents per gram, and cookies sell to distributors for $1.75
per package (regular) and $ 0.75 per package (thrift).

10 Rod shipments
A specification calls for a steel rod to be 3 meters long. When a shipment of rods is received, 25
rods are randomly selected from the shipment (shipments usually contain about 1000 rods). If the
average length of the 25 rods in the sample is between 2.95 meters and 3.05 meters, the shipment is
accepted; otherwise, it is returned to the supplier. The length of the rods is normally distributed,
and the standard deviation of length is known to be 0.20 meters. If the actual mean length of rods
in a given shipment is 2.90 meters, what is the probability that the shipment will be returned to
the supplier?

This study source was downloaded by 100000892943181 from CourseHero.com Page 3

on 11-07-2024 07:16:57 GMT -06:00

https://www.coursehero.com/file/237551861/PS3pdf/
Powered by TCPDF (www.tcpdf.org)