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Formula Sheet for CPIT 603 (Quantitative Analysis)

PROBABILITY
P(A or B) = P(A) + P(B) P(A and B)
Probability of any event: 0 P (event) 1
For Mutually exclusive events:
P(A or B) = P(A) + P(B)
P(AB) = P(A | B) P(B)
Independent Events:
P ( AB )
P(A and B) = P(A)P(B)
Conditional Probability P ( A | B )
P(A | B) = P(A)
P (B )
Dependent Events:
P(A and B) = P(A) * P(B given A)
P(A and B and C) = P(A) * P(B given A) * P(C
given A and B)
Bayes Theorem
Expected Value
P( A | B )

P (B | A) P( A)
P(B | A) P ( A) P(B | A ) P ( A )

A, B
A

= any two events


= complement of A

E X X i P X i
i 1

X1P ( X1 ) X 2 P (X 2 ) ... X n P (X n )
Xi = random variables possible values
P(Xi) = probability of each of the random
variables possible values
n

= summation sign indicating we are adding

i 1

all n possible values


E(X) = expected value or mean of the random
variable
n

2 Variance [X i E (X)]2 P(X i )


i 1

Xi
=
random variables possible values
E(X) =
expected value of the random variable
[Xi E(X)]
=
difference between each value of
the random variable and the expected value
P(Xi) =
probability of each possible value of the
random variable
Binomial Distribution
n!
Probability of r success in n trials
p r q nr
r! (n r )!

Expected value (mean) = np


Variance = np(1 p)
Geometric Distribution
Probability of number of trials
until the first success

(1 p ) x 1 p

Expected value (mean) = 1/p


Variance = (1 p)/p2
Normal Distribution (Continuous Distribution)

f (X)

Variance 2

Discrete Uniform Distribution


For a series of n values, f(x) = 1/ n
For a range that starts from a and ends with b (a,
a+1, a+2, , b) and a b
(b a )
(b a 1) 2 1

2 Variance
2
12
Poisson Distribution
x e
P( X )

X!

P(X) = probability of exactly X arrivals or


occurrences
=
average number of arrivals per unit of
time
(the mean arrival rate), pronounced lambda
e=
2.718, the base of natural logarithms
X=
number of occurrences (0, 1, 2, 3, )
Expected value = Variance =
Exponential Distribution
f ( X ) e x

( x ) 2
2 2

e
2
Completely specified by the mean,

Standard Deviation

, and the standard

X=
random variable (service times)
=
average number of units the service
facility can handle in a specific period of time

deviation,
X
Z

X = value of the random variable we want to measure


= mean of the distribution
= standard deviation of the distribution
Z = number of standard deviations from X to the mean, m

e=

2.718 (the base of natural logarithms)

Expected value =

= Average service time

1
Variance = 2

The probability that an exponentially


distributed time (X) required
to serve a customer is less than or
equal to time t is given by the formula
P ( X t ) 1 e t

Negative Binomial Distribution


x 1
xr
1 p
f (x )
pr
r 1

= r/p
= variance = r(1-p)/p2

Continuous Uniform Distribution


For a series of n values, f(x) = 1/ (b a)
For a range that starts from a and ends with b (a,
a+1, a+2, , b) and a b
( a b)
(b a ) 2

2 Variance
2
12

DECISION ANALYSIS
Criterion of Realism
Expected Monetary Value
EMV(alternative) = X i P ( X i )
Weighted average = (best in row) + (1 )(worst in
row)
Xi = payoff for the alternative in state of
nature i
For Minimization:
P(Xi) = probability of achieving payoff Xi (i.e.,
Weighted average = (best in row) + (1 )(worst in
probability of state of nature i)
row)
= summation symbol
EMV (alternative i) = (payoff of first state of nature) x
Expected Value with Perfect Information
(probability of first state of nature) + (payoff of second
EVwPI = (best payoff in state of nature i)
state of nature) x (probability of second state of nature) +
(probability of state of nature i)
+ (payoff of last state of nature) x (probability of last
EVwPI = (best payoff for first state of nature) x
state of nature)
(probability of first state of nature) + (best
payoff for second state of nature) x (probability
of second state of nature) + + (best payoff for
last state of nature) x (probability of last state of
nature)
Expected Value of Perfect Information
EVPI = EVwPI Best EMV
Expected Value of Sample Information
EVSI = (EV with SI + cost) (EV without SI)
Utility of other outcome = (p)(utility of best outcome,
which is 1) + (1 p)(utility of the worst outcome, which
is 0)

Efficiency of sample information =

EVSI
100%
EVPI

Y 0 1 X

REGRESSION MODELS

Y dependent variable (response)


X independent variable (predictor or explanatory)

0 intercept (value of Y when X 0)


1 slope of the regression line
random error

Y b0 b1 X
Y predicted value of Y
b0 estimate of 0 , based on sample results
b1 estimate of 1 , based on sample results

Error = (Actual value) (Predicted value)

e Y Y

Y
b1

X
n
Y

average (mean) of X values

average (mean) of Y values


n
( X X )(Y Y )

(X X )

b0 Y b1 X
Sum of Squares Total SST (Y Y )

Sum of Squares Error SSE e 2 (Y Y ) 2

SST SSR + SSE

Sum of Squares Regression SSR (Y Y ) 2

Correlation Coefficient = r r 2
Standard Error of Estimate s

MSE

SSR
MSR
k
k number of independent variables in the model

HypothesisTest H 0 : 1 0

degrees of freedom for the numerator = df1 = k


degrees of freedom for the denominator = df2 = n
k1
Y = 0 + 1X1 + 2X2 + + kXk +
Y=
dependent variable (response variable)
Xi = ith independent variable (predictor or
explanatory variable)
0 = intercept (value of Y when all Xi = 0)
i = coefficient of the ith independent variable
k=
number of independent variables
=
random error

H 1 : 1 0

Reject if Fcalculated F , df1 , df 2


df 1 k

SSR
SSE
1
SST
SST
SSE
Mean Squared Error s 2 MSE
n k 1
Generic Linear Model Y 0 1 X
MSR
F Statistic : F
MSE
Coefficient of Determination r 2

df 2 n k 1

p - value P ( F calculated test statistic )


Reject if p - value
Y b0 b1 X 1 b2 X 2 ... bk X k
Y = predicted value of Y

Adjusted r 2 1

SSE /( n k 1)
SST /( n 1)

b0 = sample intercept (an estimate of 0)


bi =
sample coefficient of the i th variable (an
estimate of i)

Mean Absolute Deviation (MAD)

FORECASTING
forecast error
n

(error)
Mean Squared Error (MSE)

error

Mean Absolute Percent Error (MAPE)

Mean Average Forecast

actual
n

100%

Y Yt 1 ... Yt n 1
sum of demands in previous n periods
Ft 1 t
n
n

Weighted Moving Average : Ft 1


Exponentia l Smoothing : Ft 1 Ft (Yt Ft )

(Weight in period i)(Actual value in period) w Y


( Weights )
1

w2Yt 1 ... wnYt n 1


w1 w2 ... wn

New forecast Last period s forecast (Last period s actual demand Last period s forecast)

Exponential Smoothing with Trend :


Ft 1 FITt (Yt FITt )
Tt 1 Tt (Ft 1 FITt )

b b X
Y
0
1
predicted value
where Y
b0 intercept
b1 slope of the line
X time period (i.e., X 1, 2, 3, , n)

Y a b1 X1 b2 X 2 b3 X 3 b4 X 4

FITt 1 Ft 1 Tt 1

Tracking signal

RSFE

MAD

(forecast error)
MAD

INVENTORY CONTROL MODELS


Q
Average inventory level =
2

Annual ordering cost Number of orders placed per year

Annual holding cost Average Inventory

Economic Order Quantity


Annual ordering cost = Annual holding cost

(Carrying cost per unit per year)

(Ordering cost per order)


Annual Demand
D

Co Co
Number of units in each order
Q

D
Q
Order quantity
(Carrying cost per unit per year) Q Co 2 Ch
2
Q
2DCo
Ch
EOQ Q *
2
Ch

Total cost (TC) = Order cost + Holding cost


D
Q
TC Co Ch
Q
2

ROP without Safety Stock:


Reorder Point (ROP) = Demand per day x Lead
time for a new order in days
dL
Inventory position = Inventory on hand +
Inventory on order

Cost of storing one unit of inventory for one year = Ch =


IC, where C is the unit price or cost of an inventory item
and I is Annual inventory holding charge as a percentage
of unit price or cost
2DCo
Q*
IC
EOQ without instantaneous receipt assumption
Maximum inventory level (Total produced during the
production run) (Total used during the production run)
(Daily production rate)(Number of days production)
(Daily demand)(Number of days production)
(pt) (dt)
4

pt dt p

Q
Q
d
d
Q 1
p
p
p

Total produced Q pt
Q
d
1

2
p
D
Annual setup cost Cs
Q
Average inventory

Production Run Model: EOQ without


instantaneous receipt assumption
Annual holding cost Annual setup cost
Q
d
D
1 Ch Cs
2
p
Q

Q*

2DCs

d
Ch 1
p

Q
d
1 Ch

2
p
D
Annual ordering cost Co
Q
Annual holding cost

D = the annual demand in units


Q number of pieces per order, or production run
Quantity Discount Model
2DCo
EOQ
IC
If EOQ < Minimum for discount, adjust the quantity to Q
= Minimum for discount
Total cost Material cost + Ordering cost + Holding cost
Total cost DC +

D
Q
Co + C h
Q
2

Demand is variable but lead time is constant


ROP d L Z d L

Holding cost per unit is based on cost, so Ch = IC


Where I = holding cost as a percentage of the unit cost
(C)
Safety Stock with Normal Distribution
ROP = (Average demand during lead time) + ZsdLT
Z
= number of standard deviations for a given
service level
dLT = standard deviation of demand during the lead
time
Safety stock = ZdLT
Demand is constant but lead time is variable
ROP dL Z d L

d average daily demand


d standard deviation of daily demand

L average lead time


L standard deviation of lead time

Safety Stock
ROP = Average demand during lead time + Safety
Stock
Service level = 1 Probability of a stockout
Probability of a stockout = 1 Service level

d daily demand

L lead time in days

Both demand and lead time are variable


ROP d L Z L d
2
d

2
L

Total Annual Holding Cost with Safety Stock


Total Annual Holding Cost = Holding cost of regular
inventory + Holding cost of safety stock
THC

Q
Ch (SS)Ch
2

The expected marginal profit = P(MP)


The expected marginal loss = (1 P)(ML)
The optimal decision rule
Stock the additional unit if P(MP) (1 P)ML
P(MP) ML P(ML)
P(MP) + P(ML) ML
P(MP + ML) ML
P

ML
ML + MP

PROJECT MANAGEMENT
Expected Activity Time t =

a + 4m + b
6

Earliest finish time = Earliest start time + Expected


activity time
EF = ES + t
Latest start time = Latest finish time Expected
activity time
LS = LF t
Slack = LS ES, or Slack = LF EF
Project standard deviation T

Project variance

Value of work completed = (Percentage of work


complete) x (Total activity budget)
Crash cost/Time Period

Crash cost Normal Cost


Normal time Crash time

b a

Variance =

Earliest start = Largest of the earliest finish times of


immediate predecessors
ES = Largest EF of immediate predecessors
Latest finish time = Smallest of latest start times for
following activities
LF = Smallest LS of following activities
Project Variance = sum of variances of activities on the
critical path
Z

Due date Expected date of completion


T

Activity difference = Actual cost Value of work


completed

WAITING LINES AND QUEUING THEORY MODELS


Single-Channel Model, Poisson Arrivals,
Multichannel Model, Poisson Arrivals, Exponential
Exponential Service Times (M/M/1)
Service Times (M/M/m)
= mean number of arrivals per time period (arrival m = number of channels open
= average arrival rate
rate)
= mean number of customers or units served per
= average service rate at each channel
time period (service rate)
The probability that there are zero customers in the
The average number of customers or units in the
system
1
system, L
P
for m
L

The average time a customer spends in the system,


W
W

The average number of customers in the queue, Lq


Lq

2
( )

The average time a customer spends waiting in the


queue, Wq
Wq

( )

The utilization factor for the system, (rho), the


probability the service facility is being used

The percent idle time, P0, or the probability no one


is in the system

n = m 1

n =0

n
1
1

n! m!

m
m

The average number of customers or units in the system


( / ) m

L
P0
2
(m 1)!(m )

The average time a unit spends in the waiting line or


being served, in the system
( / ) m
1 L
W
P0
2
(m 1)!(m )

The average number of customers or units in line
waiting for service
Lq L

The average number of customers or units in line


waiting for service
Wq W

1 Lq

The average number of customers or units in line


6

P0 1

waiting for service (Utilization rate)

The probability that the number of customers in the


system is greater than k, Pn>k

Pn> k

Total service cost = (Number of channels) x (Cost per


channel)
Total service cost = mCs
m = number of channels
Cs = service cost (labor cost) of each channel

1
N

N!

(N n )!
n 0

Average length of the queue



Lq N
1 P0

Average number of customers (units) in the system
L Lq 1 P0

Average waiting time in the queue

Total waiting cost = (Total time spent waiting by all


arrivals) x (Cost of waiting)
= (Number of arrivals) x (Average wait per arrival)Cw
= (W)Cw
Total waiting cost (based on time in queue) = (Wq)Cw
Total cost = Total service cost + Total waiting cost
Total cost = mCs + WCw
Total cost (based on time in queue) = mCs + WqCw

Lq

Wq

k 1

Finite Population Model


(M/M/1 with Finite Source)
= mean arrival rate
= mean service rate
N = size of the population
Probability that the system is empty
P0

(N L)
Average time in the system
W Wq

Probability of n units in the system


Pn


N!

N n !

P0 for n 0,1,..., N

Constant Service Time Model (M/D/1)


Average length of the queue
Lq

Littles Flow Equations


L = W
(or W = L/)
L q = Wq
(or Wq = Lq/)

2
2 ( )

Average waiting time in the queue

Average time in system = average time in queue +


average time receiving service
W = Wq + 1/

Wq
2 ( )

Average number of customers in the system


L Lq

Average time in the system


W Wq

MARKOV ANALYSIS
7

(i)
i

vector of state probabilities for period Pij = conditional probability of being in state j in the
future given the current state of i
P11 P12 P1n
=
(1, 2, 3, , n)
P
where
P22 P2 n
21

P
n
=
number of states

1, 2, , n =
probability of being in state 1,

Pm1 Pm 2 Pmn
state 2, , state n
For any period n we can compute the state
Equilibrium condition
probabilities for period n + 1
= P
(n + 1) = (n)P
Fundamental Matrix
M represent the amount of money that is in each of the
F = (I B)1
nonabsorbing states
Inverse of Matrix
M = (M1, M2, M3, , Mn)
n
= number of nonabsorbing states
a b
P

M
= amount in the first state or category
1
c d
M2
= amount in the second state or category
d

M
= amount in the nth state or category
n
1
r

a b
-1
r
P
c
a
c d

r
r
r = ad bc
Partition of Matrix for absorbing states
Computing lambda and the consistency index
n
I O
=

P
A

I = identity matrix
O = a matrix with all 0s

CI

n 1

Consistency Ratio
CR

CI
RI

STATISTICAL QUALITY CONTROL


Upper control limit (UCL) x z x

UCL x x A2 R

Lower control limit (LCL) x z x

LCL x x A2 R

x = mean of the sample means

= average of the samples


A2 = Mean factor
x = mean of the sample means
R

z = number of normal standard deviations (2 for


95.5% confidence, 3 for 99.7%)
x = standard deviation of the sampling distribution
x
of the sample means =
n

p-charts

UCL R D4 R

UCL p p z p

LCL R D3 R

UCLR = upper control chart limit for the range


LCLR = lower control chart limit for the range
D4 and D3 = Upper range and lower range

LCL p p z p
p = mean proportion or fraction defective in the sample

Total number of errors


Total number of records examined

z = number of standard deviations


p = standard deviation of the sampling distribution
p is estimated by p
Estimated standard deviation of a binomial distribution
p

p (1 p )
n

where n is the size of each sample


c-charts
Range of the sample = Xmax - Xmin
The mean is c and the standard deviation is equal to
c

To compute the control limits we use c 3


used for 99.7% and 2 is used for 95.5%)

(3 is

UCL c c 3 c
LCL c c 3 c

OTHERS
Computing lambda and the consistency index
The input to one stage is also the output from
n
another stage
CI
sn1 = Output from stage n
n 1
The transformation function
Consistency Ratio
CI
tn = Transformation function at stage n
CR
General formula to move from one stage to
RI
another using the transformation function
sn1 = tn (sn, dn)
The total return at any stage
fn = Total return at stage n
Transformation Functions
sn 1 an sn bn d n cn
Return Equations
rn an sn bn d n cn
Fixed cost
Probability of breaking even
Break - even point (units)
break - even point
Price/unit Variable cost/unit
Z
f

sv

P(loss) = P(demand < break-even)


P(profit) = P(demand > break-even)

Price Variable cost

(Mean demand)
unit
unit

Fixed costs

EMV

K(break - even point X)for X BEPUsing the unit normal loss integral, EOL can be
computed using
$0for X BEP

Opportunity Loss

where
K = loss per unit when sales are below the break-even
point
X = sales in units

EOL = KN(D)
EOL = expected opportunity loss
K = loss per unit when sales are below the breakeven point
= standard deviation of the distribution
N(D) = value for the unit normal loss integral for a
given value of D
D

a
ad ae

AB b d e bd be C
c
cd ce

d

a b c e ad be cf
f

a b e f ae bg af bh

c d g h ce dg cf dh

break even point

Determinant Value = (a)(d) (c)(b)


a
d
g

b
e
h

c
f
i

Determinant Value = aei + bfg + cdh gec hfa


idb
X

Numerical value of numerator determinant


Numerical value of denominator determinant

10

a
c

Original matrix

a b

c d

Determinant value of original matrix ad cb


d
Matrix of cofactors
b
d
c

Adjoint of the matrix

d
ad cb
c
ad cb

ad cb
a

ad cb

Y2 a( X X ) 2 b( X X ) c

Y Y2 Y1 b(X ) 2aX ( X ) c(X ) 2


Y b(X ) 2aX (X ) c (X ) 2

X
X
X (b 2aX cX )

b 2aX cX
X
Total cost (Total ordering cost) + (Total holding cost)
+ (Total purchase cost)

Q = order quantity
D = annual demand
Co = ordering cost per order
Ch = holding cost per unit per year
C = purchase (material) cost per unit

a
b

Y1 aX 2 bX c

D
Q
C o + C h DC
Q
2

Equation for a line


Y = a + bX
where b is the slope of the line
Given any two points (X1, Y1) and (X2, Y2)
Change in Y Y
Y Y1
b

2
Change in X X X 2 X1

TC

For the Nonlinear function


Y = X2 4X + 6
Find the slope using two points and this equation
Change in Y Y
Y Y1
b

2
Change in X X X 2 X1
Y 0

Y C
Y X

Y cX n
1
Y
Xn
Y g ( x) h( x )
Y g ( x) h( x )

Y nX n 1
Y cnX n 1
n
X n 1
Y g ( x ) h( x )
Y g ( x ) h( x )
Y

Economic Order Quantity


dTC DCo Ch

dQ
Q2
2
2DCo
Q
Ch
d 2TC DCo

dQ 2
Q3

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