Homework #2: Due March 27, 2012

Problems #1 - #4 are to be worked at the study group level - please put all of the names of your study group members on your submission to me. Problems #5 - #7 are to be done at the individual level - each member of the study group will submit their own individual work to me. No collaboration between study group members for this problem.
(1.) 10 Points - A company receives a shipment of 20 items. Because inspection of each individual item is expensive and time consuming, it has a policy of checking a random sample of 6 items from such a shipment, accepting delivery if no more than one sampled item is defective. Using the hypergeometric distribution formula, calculate the probability that a shipment with 5 defective items will be accepted. (2.) 18 Points - Your company builds bridges. Based upon historical data you know that the probability of winning a contract to build a bridge is given by the following expression, where tbid represents the time (months) you claim it will take you to build a bridge: Pwin = 1.40 0.03* tbid 15 tbid 45 Based upon historical data you also know that, given that you've won the job, the probability of exceeding the time you claim it will take you to build the bridge is given by the expression: PPenalty = 0.321 + 15.3 / tbid 15 tbid 45 Suppose that the profit your firm will earn if they win the contract is $70,000,000. Further assume that a financial penalty of $100,000,000 will be imposed on your firm if the actual time to build the bridge exceeds the time you promised in your proposal. If your firm wants to maximize expected profit, create a decision tree for expected net profit and use a spreadsheet and determine the optimum bid time you should promise your customer.

(3.) 13 Points Assume that the historical rate of return for Acme, Inc. stock can be described by a normal distribution with the following parameters:

return = 12.2% return = 7.2%

(a) Calculate the probability that Acme stock will have a rate of return greater than 20%

this year. (5 Points)

(b) Calculate the probability that Acme stock will have a negative rate of return this year.

(5 Points)
(c) Calculate the probability that Acme stock will have a rate of return between 5% and

15% this year. (3 Points)

(4.) 14 Points Meineke Muffler guarantees their car mufflers for four years. If the muffler fails anytime within four years of purchase, the company promises to give the customer a new muffler. For every muffler they sell they make a gross profit of $9 from which they must then pay for possible replacements under warranty. Every muffler replaced under warranty costs the company $35 of gross profit. It is known from historical data that muffler lifetimes are normally distributed with a mean of eight years and a standard deviation of three years. If Meineke Muffler wants their average net profit per sale to be $7.25, what should their new guarantee period be?

(5.) 15 Points - You are the owner of a large bookstore that also sells the daily New York Times newspaper. From historical data you know that the daily demand for this newspaper is normally distributed with a mean of 155 papers sold per day and a standard deviation of 35 papers sold per day A stock out is said to have occurred when daily demand exceeds available inventory. You have established a corporate policy that says that the maximum allowable probability of a stock out is 5%. Calculate the minimum number of newspapers that you should have on hand consistent with this stock out policy.

(6.) 15 Points - You are the President of the Watts Lighting Corporation, an organization that manufactures light bulbs. From historical data, you know that your light bulbs have a mean lifetime of 1000 hours, with a standard deviation of 200 hours. Currently, all of the bulbs produced are sold for the same price, $1.00 each. Your marketing people tell you those bulbs that have lifetimes greater than 1150 hours could command a premium price ($1.50 each). Likewise, bulbs that last less than 920 hours are considered inferior and would sell for $0.80 each. Bulbs with lifetimes between 920 and 1150 hours are considered "average" and can be sold for the current price, $1.00 Each year you produce 10,000,000 light bulbs. Your operations people tell you that the cost associated with testing all of the bulbs to determine their "quality level" (and therefore, their potential price) is $500,000. Strictly on statistical grounds, do you implement this "good ... better ... best" pricing strategy? Why or why not?

(7.) 15 Points - You own a well-respected roofing company. A roofing shingle manufacturer claims their shingles last for an average of 20 years. In addition, they tell you that the lifetime of their shingles is normally distributed with a standard deviation of 2 years. Before you buy shingles from the company, you want to determine how long the shingles might really last. To determine this you select, at random, homes that are having their roofs replaced that used the shingles of this company. (a) Calculate the probability that an individual roof would last 17.5 years or less. (5 Points) (b) Would you consider the results of the calculation in part (a) to be credible evidence against the manufacturers lifetime claim? Why or why not? (1 Point) (c) Calculate the probability that a random sample of 8 roofs would have an average lifetime of 17.5 years or less. (8 Points) (d) Would you consider the results of your calculation in part (c) above to be credible evidence against the manufacturers lifetime claim? Why or why not? (1 Point)