Question

Sharpe Knife Company expects sales next year to be \(1,550,000 if the economy is strong, \)825,000 if the economy is steady, and $550,000 if the economy is weak. Mr. Sharpe believes there is a 30 percent probability the economy will be strong, a 40 percent probability of a steady economy, and a 30 percent probability of a weak economy. What is the expected level of sales for the next year?

Short answer

The expectedlevel of sales for next year isl$960,000.

Step-by-step solution

Information given in the question

The following information is provided:

Expected sales whentheeconomy is strong = $1,550,000

Expected sales whentheeconomy is steady = $825,000

Expected sales whentheeconomy is weak = $550,000

Probability of strong economy = 30%

Probability of steady economy = 40%

Probability of weak economy = 30%

Expected sales for next year

The expected level ofsales for next year is $960,000

$$\begin{gathered} Expectedsalesfornextyear=\sum _{}\left(Expectedsales\times Probability\right) \\ =\left(1,550,000\times 30\%\right)+\left(825,000\times 40\%\right)+\left(550,000\times 30\%\right) \\ =\$465,000+330,000+165,000 \\ =\$960.000 \end{gathered}$$