Question

Gary's Pipe and Steel company expects sales next year to be $800,000 if the economy is strong, $500,000 if the economy is steady, and $350,000 if the economy is weak. Gary believes there is a 20 percent probability the economy will be strong, a 50 percent probability of a steady economy, and a 30 percent probability of a weak economy. What is the expected level of sales for next year?

Answer 1

Answer:

$515,000

Explanation:

Data provided in the question:

Expected sales next year if economy is strong = $800,000

Expected sales next year if economy is steady = $500,000

Expected sales next year if economy is weak = $350,000

Probability of strong economy = 20%

Probability of steady economy = 50%

Probability of weak economy = 30%

Now,

Expected level of sales for next year

= ∑(Expected sales × Respective probability)

= [ 20% ×  $800,000 ] + [ 50% × $500,000 ] + [ 30% ×  $350,000 ]

= $160,000 + $250,000 + $105,000

= $515,000