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?

Short answer

The expected level of sales for next year is$500,000.

Step-by-step solution

Information given in the question

The following information is provided:

Expected sales whentheeconomy is strong = $800,000

Expected sales whentheeconomy is steady = $500,000

Expected sales whentheeconomy is weak = $300,000

Probability of strong economy = 20%

Probability of steady economy = 50%

Probability of weak economy = 30%

Expected sales for next year

$$\begin{gathered} Expectedsalesfornextyear=\sum _{}\left(Expectedsales\times Probability\right) \\ =\left(800,000\times 0.2\right)+\left(500,000\times 0.5\right)+\left(300,000\times 0.3\right) \\ =\$160,000+\$250,000+\$90,000 \\ =\$500,000 \end{gathered}$$

The expected level of sales for next year is $500,000.