Garys Pipe and Steel company expects sales next year to be 1

Gary’s Pipe and Steel company expects sales next year to be $1,140,000 if the economy is strong, $770,000 if the economy is steady, and $399,000 if the economy is weak. Gary believes there is a 20 percent probability the economy will be strong, a 65 percent probability of a steady economy, and a 15 percent probability of a weak economy.

What is the expected level of sales for next year?

Solution

the expected level of sales for next year = expects sales of economy * probability of the economy

= 1140000 * 20% + 770000 * 65% + 399000 * 15% = $788350