Austin Electronics expects sales next year to be at $900,000 if the economy is strong, $650,000 if the economy is steady, and $375,000 if the economy is weak. The firm believes there is a 15 percent probability the economy will be strong, a 60 percent probability of a steady economy, and a 25 percent probability of a weak economy. What is the expected level of sales for next year?

Question

Austin Electronics expects sales next year to be at $900,000 if the economy is strong, $650,000 if the economy is steady, and $375,000 if the economy is weak. The firm believes there is a 15 percent probability the economy will be strong, a 60 percent probability of a steady economy, and a 25 percent probability of a weak economy. What is the expected level of sales for next year?

Answer 1

To find the expected level of sales for next year, we need to calculate the weighted average of the potential sales figures based on the probabilities of each economic scenario.

Step 1: Multiply each potential sales figure by its corresponding probability:

Sales in a strong economy: $900,000 * 0.15 = $135,000
Sales in a steady economy: $650,000 * 0.60 = $390,000
Sales in a weak economy: $375,000 * 0.25 = $93,750

Step 2: Add up the weighted values:

$135,000 + $390,000 + $93,750 = $618,750

Therefore, the expected level of sales for next year is $618,750.