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Chapter 3: 1BP (page 182)

Gary鈥檚 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

Expert verified

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

Step by step solution

01

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%

02

Expected sales for next year

Expectedsalesfornextyear=鈭�Expectedsales脳Probability=800,000脳0.2+500,000脳0.5+300,000脳0.3=$160,000+$250,000+$90,000=$500,000

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

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Most popular questions from this chapter

A firm that uses short-term financing methods for a portion of permanent current assets is assuming more risk but expects higher returns than a firm with a normal financing plan. Explain.

Route Canal Shipping Company has the following schedule for aging of accounts receivable:

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Assume that Atlas Sporting Goods Inc. has \(840,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 15 percent, but with a high-liquidity plan the return will be 12 percent. If the firm goes with a short-term financing plan, the financing costs on the \)840,000 will be 9 percent, and with a long-term financing plan, the financing costs on the $840,000 will be 11 percent. (Review Table 6-11 for parts a, b, and c of this problem.)

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