Chapter 04 - The Normal Distribution

CHAPTER 4
THE NORMAL DISTRIBUTION

NOTE: A linear interpolation was used in the solution of most problems using the normal table. Thus
small discrepancies may be found when comparing the answers with solutions obtained without an
interpolation.

4-1. P(–1 < Z < 1) = 2(.3413) = 0.6826

P(–1.96 < Z < 1.96) = 0.95
P(–2.33 < Z < 2.33) = 0.9802

Template (Normal Distribution, Mean=0, stddev=1)

x1 P(x1<X<x2) x2
-1.00 0.6827 1.00
-1.96 0.9500 1.96
-2.33 0.9802 2.33

4-2. P(–2 < Z < 1) = .4772 + .3413 = 0.8185

4-3. P(–2.5 < Z < –0.89) = .4938 – .3133 = 0.1805

4-4. P(Z > 3.02) = .5 – .4987 = 0.0013

4-5. P(2 < Z < 3) = .4987 – .4772 = 0.0215

(Normal Distribution, Mean=0, stddev=1)
x1 P(x1<X<x2) x2
2.00 0.0214 3.00

4-6. P(Z < –2.5) = .5 – .4938 = 0.0062

4-7. P(Z > –2.33) = .5 +.4901 = 0.9901

(Normal Distribution, Mean=0, stddev=1)
x P(X>x)
-2.33 0.9901

4-8. P(–2 < Z < 300) = a number very close to .5 + .4772 = 0.9772

4-9. P(Z < –10) = a very small number, close to zero.

4-10. P(–.01 < Z < .05) = .0199 + .0040 = 0.0239

(Normal Distribution, Mean=0, stddev=1)
x1 P(x1<X<x2) x2
-0.01 0.0239 0.05

4-11. P(–2 < Z < 2) = 2(.4772) = 0.9544

4-1
Chapter 04 - The Normal Distribution

4-12. z =  1.645

4-13. Not likely. P(Z < –4) = .5 – .49997 = 0.00003

4-14. P(Z > z) = 0.85

z = –1.036 (approximately).
(Normal Distribution, Mean=0, stddev=1)
x P(>x)
-1.04 0.85

4-15. P(Z < z) = 0.685

z = 0.48

4-16. P(Z > z) = 0.5

z=0
Do not need a normal table to find this: the Z variable has mean = 0 by definition.
4-17. P(Z > z) = 0.12  P(0 < Z < z) = 0.5 – 0.12 = 0.38
z = 1.175

4-18. Look for z > 0 such that P(0 < Z < z) = 0.40/2 = 0.20: z =  0.524
(Normal Distribution, Mean=0, stddev=1)
Symmetric Intervals
x1 P(x1<X<x2) x2
-0.524401 0.4 0.524401

4-19. Look for z > 0 such that P(0 < Z < z) = 0.95/2 = 0.475: z =  1.96

4-20. Look for z > 0 such that 0.5 – P(0 < Z < z) = 0.01/2 = 0.005, which means
P(0 < Z < z) = 0.495: z =  2.576
(  2.575 is the value obtained by a linear interpolation,  2.576 is more accurate.)

4-21. P(|Z| > 2.4) = P(Z > 2.4 or Z < –2.4) = 2P(Z > 2.4) = 2(.5 – .4918) = 0.0164
(Normal Distribution, Mean=0, stddev=1)
P(X<x) x x P(X>x)
0.0082 -2.4 2.4 0.0082

4-22. X ~ N(650, 402)

 600 − 650 
P(X < 650) = P  Z   = P(Z < –1.25) = .5 – .3944 = 0.1056
 40 

4-2
Chapter 04 - The Normal Distribution

4-23. X ~ N(410, 22)

 407 − 410 415 − 410 
P(407 < X < 415) = P  <Z<  = P(–1.5 < Z < 2.5) =
 2 2 
.4332 + .4938 = 0.927
Normal Distribution
x1 P(x1<X<x2) x2
Mean Stdev
407.00 0.9270 415.00
410 2

4-24. X ~ N(500, 202)

 555 − 500 
P(X > 555) = P  Z   = P(Z > 2.75) = .5 – .4970 = 0.003
 20 

4-25. X ~ N(–44, 162)

 0 − (−44) 
P(X > 0) = P  Z   = P(Z > 2.75) = 0.003
 16 

4-26. X ~ N(0,42)
 2.5 − 0 
P(X > 2.5) = P  Z   = P(Z > .625) = .5 – .234 = 0.266
 4 
Normal Distribution x P(X>x)
Mean Stdev
2.5 0.2660
0 4

4-27. X ~ N(16, 32)

P(11< X < 20) = P(–1.667 < Z < 1.333) = .4521 + .4088 = .8609
P(17 < X < 19) = P(.33 < Z < 1) = .3413 – .1306 = 0.2107
P(X > 15) = P(Z > –.33) = .5 + .1306 = 0.6306

4-28. X ~ N(45, 102)

a. P(X < 60) = P(Z < 1.5) = .5 + .4332 = 0.9332
b. P(X < 40) = P(Z < –.5) = .5 – .1915 = 0.3085
c. P(X > 70) = P(Z > 2.5) = .5 – .4938 = 0.0062

Normal Distribution
Mean Stdev
45 10

P(X<x) x x P(X>x)
0.9332 60 70 0.0062
0.3085 40

4-3
Chapter 04 - The Normal Distribution

4-29. X ~ N(8,000, 1,0002)

P(X  9,322) = P(Z  1.322) = .5 – .4069 = 0.0931

4-30. (Use template: Normal Distribution.xls, sheet: normal)

Normal Distribution
Mean Stdev
1.36 0.03

a. P(X >1.42) = P(Z > 2.0) = 0.5 – 0.4772 = 0.0228

x P(X>x)
1.42 0.0228
b. P(X<1.35) = P(Z < -0.333) = 0.5 – 0.1306 = 0.3694
P(X<x) x
0.3694 1.35
c. P(1.16 <X <1.23) = P(-6.67 <Z< -4.33) = 0.00 + 0.00 = 0.000
x1 P(x1<X<x2) x2
1.16 0.0000 1.23

4-31. (Use template: Normal Distribution.xls, sheet: normal)

Normal Distribution
Mean Stdev
87 3

P(X > 89) = P(Z >0.667 ) = 0.5 – 0.2475 = 0.2525

x P(X>x)
89 0.2525

4-32. (Use template: Normal Distribution.xls, sheet: normal)

Normal Distribution
Mean Stdev
10.42 0.87

P(underweight) =0.05
P(<x) x
0.05 8.99
A cat is underweight if it weighs less than 8.99 pounds.

P(overweight) = 0.10
x P(>x)
11.53 0.1
A cat is overweight if it weighs more than 11.53 pounds.

A cat is normal weight if it weighs between 8.99 and 11.53 pounds.

4-33. P(2520 < X < 2670) = P(–1.6 < Z < 1.4) = .4192 + .4452 = .8644

4-4
Chapter 04 - The Normal Distribution

4-34. (Use template: Normal Distribution.xls, sheet: normal)

Normal Distribution
Mean Stdev
12.5 2.5

P(X> 17.5) = P(Z > 2.0) = 0.5 – 0.4772 = 0.0228

x P(X>x)
17.5 0.0228

 12 − 10.5 
4-35. a. P(X > 12) = P  Z   = P(Z > .316) = 0.50 – .1241 = .3759
 4.75 
 0 − 10.5 
b. P(X < 0) = P  Z   = P(Z < –2.211) = 0.50 – .4865 = .0135
 4.75 
 5 − 10.5 
a. P(X > 5) = P  Z   = P(Z > –1.158) = 0.50 + .3766 = .8766
 4.75 
Normal Distribution
Mean Stdev
10.5 4.75

P(X<x) x x P(X>x)
0.0135 0 12 0.3761
5 0.8765

4-36. a. P(x>187.6) = P(z>0) = 0.5000

b. P(x>200) = P(z>1) = 0.1587
c. P(x>x*) = 0.05 x* =  + 1.645σ = 207.998 or 208 safety stock = 20.4
d. P(x>x*) = 0.01 x* =  + 2.326σ = 216.44 or 216 safety stock = 28.4

4-37. P(X < 100) = P(Z <-1.82 ) = 0.50 - .4656 = .0344

Normal Distribution
Mean Stdev P(X<x) x
145.5 25 0.0344 100

4-38. X ~ N(120, 442) P(X < x) = 0.56

P(Z < z) = 0.56, thus:
z = 0.15
x =  + z = 120 + (.15)(44) = 126.6

4-5
Chapter 04 - The Normal Distribution

Normal Distribution
Mean Stdev P(<x) x
120 44 0.56 126.64

4-39. X ~ N(16.5, 0.82) P(X > x) = 0.85

P(Z > z) = 0.85, thus:
z = –1.04
x =  + z = 16.5 – 1.04(.8) = 15.67

4-40. X ~ N(19,500, 4002) P(X > x) = 0.02

P(Z > z) = 0.02, thus:
TA = 0.48 and z = 2.054
x =  + z = 19,500 + 2.054(400) = 20,321.6
4-41. X ~ N(88, 52)
P( x1 < X < x2 ) = 0.98
P(–z < Z < z) = 0.98 TA = .98/2 = .49
x1 = 88 – 2.33(5) = 76.35
x2 = 88 + 2.33(5) = 99.65

Normal Distribution Symmetric Intervals

Mean Stdev x1 P(x1<X<x2) x2
88 5 76.36829 0.98 99.63171

4-42. X ~ N(32, 72) Find x1 , x2 so that

P( x1 < X < x2 ) = .99 TA = .99/2 = .495
z =  2.576
x1, 2 = 32  2.576 (7)
= 13.97 and 50.03

4-43. X ~ N(–61, 222)

P(X > x) = 0.25 TA = .25
z = 0.675 x = –61 + 0.675(22) = –46.15

4-44. X ~ N(97, 102) P(102 < X < x) = 0.05

 102 − 97 x − 97 
P Z  = 0.05
 10 10 
P(0.5 < Z < z) = 0.05
TA(0.5) = 0.1915. We need z such that TA(z) = 0.1915 + 0.05 = 0.2415

4-6
Chapter 04 - The Normal Distribution

z is approximately 0.65
x = 97 + (.65)(10) = 103.5
Check: P(102 < X < 103.5) = P(.5 < Z < .65)
= TA(.65) – TA(.5) = .2422 – .1915 = 0.0507

4-45. X ~ N(600, 10,000)  = 10,000 = 100

P(X > x1 ) = 0.01 z1 = 2.326
x1 = 600 + 2.326(100) = 832.6
P(X < x 2 ) = 0.05 z 2 = –1.645
x 2 = 600 – 1.645(100) = 435.5

4-46. X ~ N(25,000, 5,0002)

P(X > x) = 0.15
TA = .35 z = 1.037
x =  + z = 25,000 + (1.037)5,000 = $30,185

Normal Distribution
Mean Stdev x P(>x)
25000 5000 30182.16 0.15

4-47. z =  1.96 X ~ N(27,009, 4,5302)

Interval: 27,009  1.96 (4,530) = [18,130.2, 35,887.8]

4-48. X ~ N(11.2, 0.62)

0.99 probability implies TA = .99/2 = .495
z =  2.576
x1, 2 = 11.2  2.576 (0.6) = 9.654, 12.746

4-49. (Use template: Normal Distribution.xls, sheet normal)

Normal Distribution
Mean Stdev
71 3

P(X<x1) = 0.90 TA = 0.40 Z = 1.28 x1 = 71 + 1.28(3) = 74.84 (approximately)

P(<x) x
0.90 74.84

4-7
Chapter 04 - The Normal Distribution

4-50. X ~ N(1.35, .152)

0.90 probability of being < z means we want TA = .90 – .5 = .400 so z = 1.282
Therefore X = 1.35 + 1.28(.15) = 1.54 (approximately)

(Use template: Normal Distribution.xls, sheet: normal)

Normal Distribution
Mean Stdev
1.35 .15

P(<x) x
0.9 1.54

4-51. X ~ N(2014, 22)

0.80 probability of being > z means we want TA = .80 –.50 = .30, so z = .84 (approximately)
Therefore X = 2014 – .84(2) = 2012.32

(Use template: Normal Distribution.xls, sheet: normal)

Normal Distribution
Mean Stdev
2014 2

x P(>x)
2012.32 0.8

4-52. Assume independence of parties arriving for dinner.

P(success) = 0.7
P(X > 15) = 1 – F(15) = F(4) [using p = 0.3] = 0.2375
Using a normal approximation:
 = np = 20(.7) = 14  = npq = 2.049
P(X > 15) = P(X > 15.5) [using a continuity correction]
 15.5 − 14 
= PZ   = P(Z > .732) = 0.2321
 2.049 

Normal Approximation of Binomial Distribution

n p Mean Stdev
20 0.7 14 2.04939

x P(X>x)
15.5 0.2321

4-53. Random sampling from large population implies a binomial distribution.

n = 100 p = 0.4  = np = 40  = npq = 4.899

4-8
Chapter 04 - The Normal Distribution

P(X > 20) = P(X > 19.5) [continuity correction]

 19.5 − 40 
= PZ   = P(Z > –4.18) > 0.99997
 4.899 

4-54. n = 2000 p = 0.779 Assume independence

 = 2000(.779) = 1558  = npq = 18.5558
P(X > 1500) = P(X > 1499.5) [cont. corr.] = P(Z > –3.14) = 0.9992

Normal Approximation of Binomial Distribution

n p Mean Stdev
2000 0.779 1558 18.5558

x P(X>x)
1499.5 0.9992

4-55. P(x  200) = .3804

Normal Approximation of Binomial Distribution

n p Mean Stdev
328 0.6 196.8 8.87243

P(X<x) x x P(X>x) x1 P(x1<X<x2) x2

199.5 0.3804

4-56. Assume independence of students.

p = 0.25 n = 1,889  = np = 472.25  = npq = 18.82

4-9
Chapter 04 - The Normal Distribution

 499.5 − 472.25 
P(X > 500) = P(X > 499.5) [cont. corr.] = P  Z  
 18.82 
= P(Z > 1.448) = .5 – .4262 = 0.0738

4-57. (Use template: Normal Distribution.xls, sheet: normal approximation)

Normal Approximation of Binomial Distribution

n p Mean Stdev
122 0.44 53.68 5.48277

P(x > 61) = 0.1068

x P(X>x)
60.5 0.1068

4-58. (Use template: Normal Distribution.xls, sheet: normal approximation)

Normal Approximation of Binomial Distribution
n p Mean Stdev
200 0.59 118 6.95557

P(x > 120) = 0.4146

x P(X>x)
119.5 0.4146

4-59. X ~ N(549, 682)

 500 − 549 
P(X > 500) = P  Z   = P(Z > –.72) = .5 + .2642 = 0.7642
 68 

4-60. X ~ N(785, 602)

 800 − 785 
P(X > 800) = P  Z   = P(Z > .25) = .5 – .0987 = 0.4013
 60 
 750 − 785 850 − 785 
P(750 < X < 850) = P  Z 
 60 60 
= P(–.58333 < Z < 1.0833) = .2201 + .3606 = 0.5808
i.e., about 58% of all working days.
P(X < 665) = P(Z < –2) = .5 – .4772 = 0.0228

4-61. X ~ N(650, 502)

 700 − 650 
P(X > 700) = P  Z   = P(Z > 1) = .5 – .3413 = 0.1587
 50 

4-10
Chapter 04 - The Normal Distribution

 750 − 650 
P(X < 750) = P  Z   = P(Z < 2) = .5 + .4772 = 0.9772
 50 

4-62. (Use template: Normal Distribution.xls, sheet: normal)

Normal Distribution

Mean Stdev
33.3 6

P(X > 40) = P(Z > 1.117) = 0.1321

x P(X>x)
40 0.1321

P(X < 30) = P(Z < -0.55) = 0.2912

P(X<x) x
0.2912 30

4-63. X ~ N(800,000, 10,0002)

P(X > x) = 0.80
P(Z > z) = 0.80 TA = .30 z negative z = –0.842
x =  + z = 800,000 – (.842)10,000 = 791,580 barrels per day.

4-64. X ~ N(105, 4.8992)

P(X > x) = 0.90
z = –1.282
x = 105 – 1.282(4.899) = $98.72 (approximately)

Normal Distribution
Mean Stdev
105 4.899

x P(>x)
98.72 0.9

4-65. X ~ N(8, 0.52)

find x1 x2 such that P (x1  X  x2 ) = 0.95
z1, 2 =  1.96
x1, 2 =  + z1, 2 = 8  1.96(.5) = [7.02, 8.98] percent.

4-11
Chapter 04 - The Normal Distribution

4-66. X ~ N(50,000, 3,0002)

Give 0.99 probability bounds:
z =  2.576
Bounds are 50,000  2.576(3,000) = [42,272, 57,728]

4-67. X ~ N(2,348, 7622)

P(X > x) = 0.85 z = –1.04
x = 2,348 – 1.04(762) = 1,555.52
0.80 probability bounds: z =  1.28
x1 x2 = 2,348  1.28(762) = [1,372.64, 3,323.36], i.e., they are 80% sure that anywhere
from 1,373 to 3,323 people will sign up for the trip.

4-68. X ~ N(12.1, 2.52)

P(X > x) = 0.75 z = –0.675
x = 12.1 – .675(2.5) = 10.4125%
P(X < x  ) = 0.75 z  = 0.675
x  = 12.1 + (.675)(2.5) = 13.7875%

4-69. X ~ N(15.6, 4.12)

P(X > x) = 0.95 z = –1.645
x = 15.6 – 1.645(4.1) = 8.8555 KW.

4-70. X ~ N(4.92, 0.32)

P(Z < z) = 0.95 z = 1.645
x =  + z = 5.41 (approximately)

(Use template: Normal Distribution.xls, sheet: normal)

Normal Distribution
Mean Stdev
4.92 0.3

P(<x) x
0.95 5.41

4-71. .5 – TA(z = 3.000) = .5 – .4987 = .0013, so the total area outside of z =  3.000 is 2(.0013) =
.0026, or 0.26%. Thus, define “too many” items as “more than 0.26%.” If noticeably more than
0.26% of the items are out of bounds, assuming the normal distribution for when the process is in
control, then a very low-probability event is being observed and the distribution is probably not
in fact a normal one, i.e., the process is probably not in control.

4-12
Chapter 04 - The Normal Distribution

4-72. X ~ N(  ,  2 )
P(X > 671,000) = 0.45 P(X > 712,000) = 0.10
z1 = 0.126 z 2 = 1.282
671,000 −  712,000 − 
0.126 = 1.282 =
 
671,000 –  = 0.126 
712,000 –  = 1.282 
41,000 = 1.156   = 35,467.128
 = 671,000 – 0.126  = 666,531.1

4-73. X ~ N(  ,  2 )
P(X > 65) = 0.45 P(X > 70) = 0.15
z1 = 0.126 z 2 = 1.0365
65 −  70 − 
= 0.126 = 1.0365
 
70 –  = 1.0365 
65 –  = 0.126 
5 = .9105   = 5.49
 = 70 – 1.0365  = 64.31

4-74. X ~ N(  ,  2 )
P(X > 1,000) = 0.1 z = 1.282
P(X > 650) = 0.5 z=0
1,000 −  650 − 
= 1.28 =0
 
1,000 – 650 = 1.28 
 = 650  = 273.01

4-75. X ~ N(4,500, 1,8002)

P(X < x) = 0.80 z = 0.842
x = 4,500 + (.842)1,800 = 6,015.6

Normal Distribution
Mean Stdev
4500 1800

P(<x) x
0.8 6014.92

4-13
Chapter 04 - The Normal Distribution

4-76. X ~ N(34,750, 3,5602)

P(X < x) = 0.75 z = 0.675
X = 34,750 + (.675)3,560 = 37,153 papers.

4-77. P(X < 5.25) = P(Z < -8.3) = 0.0000

(Use template: Normal Distribution.xls, sheet: normal)
Normal Distribution
Mean Stdev
5.25 0.05

P(X<x) x
0.0000 1.1

4-78. (Use template: Normal Distribution.xls, sheet: normal)

Normal Distribution
Mean Stdev
6.17 0.25

P(Z < z) = 0.90 z = 1.282

x =  + z = 6.49 (approximately)
P(<x) x
0.9 6.49

4-79.
a) Since each phase of the project is normally distributed, we can add the individual phase
means and variances to get the overall project duration mean and variance:
E(Project) = E(Phase 1) + E(Phase 2) + E(Phase 3) = 84 + 102 + 62 = 248
V(Project) = V(Phase 1) + V(Phase 2) + V(Phase 3) = 9 + 16 + 4 = 29
Std dev (Project) = 5.3852

b) P(x  250) = 0.6448

c) P(x  240) = 0.0687

4-14
Chapter 04 - The Normal Distribution

Normal Distribution

Mean Stdev
248 5.3852

P(X<x) x x P(X>x)
0.6448 250
0.0687 240

4-80.
Normal Distribution

Mean Stdev
487 98

P(X<x) x x P(X>x) x1 P(x1<X<x2) x2

500 0.4472 600.00 0.1096 700.00
420.85 0.7500 841.70
279.23 0.7500 558.45

Inverse Calculations

P(<x) x x P(>x) Symmetric Intervals

0.75 553.10 x1 P(x1<X<x2) x2
374.2658 0.75 599.73424

4-15
Chapter 04 - The Normal Distribution

a) P(X >500) = 0.4472

b) P(600  X  700) = 0.1096
c) P(x ≥ X) = 0.75 z = -0.67 x = 487 – 0.67(98) = 421.34
d) narrowest interval containing 75% of the scores is: [374.27, 599.73]
e) the two intervals [x, 2x] are: [420.85, 841.70] [279.23, 558.45]

4-81.
Normal Distribution

Mean Stdev
11200 8250

P(X<x) x x P(X>x) x1 P(x1<X<x2) x2

0.0873 0 10000.00 0.4148 20000.00
0.0051 -10000

Inverse Calculations

P(<x) x x P(>x) Symmetric Intervals

16764.55 0.25 x1 P(x1<X<x2) x2

a) P(X < 0) = 0.0873

b) P( 10000  X  20000) = 0.4148
c) P(X > x) = 0.25, x = 16764.55
d) P(X < -10000) = 0.0051
e) There is a 91.27% probability of making a profit, and a 99.49% of not having to borrow
additional cash.
4-82 (Use template: Normal Distribution.xls, sheet: normal)
(i) Proportion of acceptable rods:
The manufacturing process is a normal distribution:
Normal Distribution
Mean Stdev
973.8 0.32

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Chapter 04 - The Normal Distribution

The proportion within the specifications 974 ± 1.2 is 0.9991

x1 P(x1<X<x2) x2
972.80 0.9991 975.20

Tolerance 1.2 1.2

(ii) Cp = = = = 1.25
3*  3 * 0.32 0.96
(iii)
A larger value of the process capability index, given the tolerance level, would ensure more units
would meet the customer’s specifications because the standard deviation would be decreasing as
Cp increases.

Offset 0.2
(iv) Cpk = Cp − = = 0.208
3*  0.96

(v)
Mean Stdev
974 0.32

x1 P(x1<X<x2) x2
972.80 0.9998 975.20
The proportion increases to 0.9998

(vi) Tolerance = 3*σ*Cp =3*1*1.2=3.6

Offset = (Cp - Cpk )*3 σ = (1.2-0.9)*3 = 0.9
specification: 1000 ± 3.6
Process: 999.1 ± 1.0

x1 P(x1<X<x2) x2
996.40 0.9965 1003.60

4-83 (Use template: Normal Distribution.xls, sheet: normal)

(i) yes the total revenue will be normally distributed.

(ii) Mean Total Revenue = 5780 + 641 + 712 = 7133

Standard deviation = square root(1422 + 782 + 722) = 177.29

Mean Stdev
7133 177.29

(iii)
P(X > 7000) = 0.7734
x P(X>x)
7000 0.7734

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Chapter 04 - The Normal Distribution

Case 4: Acceptable Pins

1. 63.39% of the pins will be acceptable.

2. The mean should be adjusted to 1.000" to maximize the acceptance rate.
3. A standard deviation needs to be 0.00625 to achieve 90% acceptance rate.
4. The standard deviation has to be 0.00486" for 95% and 0.00349" for 99% acceptance rate.
5. It is easier to reset the machine to a mean of 1.000". Reducing the standard deviation
will require a large improvement in the manufacturing process.
6. The cost for 90% acceptance rate is 150(11.75)^2 = $20,709
Similarly for 95%, the cost is $ 25,900
for 99%, the cost is $ 31,580
7
Reduction in Stdev Mean
Acceptance Stdev in Reduction adjustment
rate 0.000" cost cost Total cost
$
90% 5.87 $ 5,168 $ 80 5,248
$
95% 7.79 $ 9,103 $ 80 9,183
$
99% 10.22 $ 15,667 $ 80 15,747

8. The mean should clearly be 1.000". The standard deviation question needs more cost data.
Subjectively one can say that the company should go for 99% acceptance at a cost of $15,747
and set the standard deviation at 0.00778".

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Chapter 04 - The Normal Distribution

Case 5: Multi-Currency Decision

1. Qty Price Mean Stdev

12 57810 1.41 0.041 $/£
8 8640540 0.00904 0.00045 $/¥
5 97800 0.824 0.0342 $/€
2 4015000 0.0211 0.00083 $/R

Mean of Total Revenue 2175398.05 $

Variance of Total
Revenue 2100663074.53 $^2
Stdev of Total Revenue 45832.99 $

P(X >
2. 2,250,000) = 0.0518

P(X <
3. 2,150,000) = 0.2898

4. Report the mean, the variance and the probability of revenue being less than $ 2,150,000

5. Subjective answer. A common answer might be that the risk is high due to the large std devn.

6. The sales manager is more risk averse, since he/she is willing to settle for $2,150,000.
The CEO is willing to take the risk of getting less than $2,150,000.

7. Same as the answer to part 3, which is 0.2898

8. Value at risk 49990.51 $

9. Bank's expected profit = 25398.05 $

10. 197% This is high risk.

11. Because less conversion is involved the risk will be less.

12. No, the bank will not plan to convert all currencies to US$.

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