Expected Value Sharpe Knife Company expects sales next year

Expected Value

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?

Solution

The expected value is summation(probablity * cost)

here, the expected value is:

0.3*1,550,000 + 0.4*825,000 + 0.3*550,000 =

$960000