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Chapter 3: 2BP (page 184)

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

Expert verified

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

Step by step solution

01

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%

02

Expected sales for next year

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

Expectedsalesfornextyear=∑Expectedsales×Probability=1,550,000×30%+825,000×40%+550,000×30%=$465,000+330,000+165,000=$960.000

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Most popular questions from this chapter

Esquire Products Inc. expects the following monthly sales:

January

\(28,000

February

\)19,000

March

\(12,000

April

\)14,000

May

\(8,000

June

\)6,000

July

\(22,000

August

\)26,000

September

\(29,000

October

\)34,000

November

\(42,000

December

\)24,000

Total annual sales

\(264,000

Cash sales are 40 percent in a given month, with the remainder going into accounts receivable. All receivables are collected in the month following the sale. Esquire sells all of its goods for \)2 each and produces them for \(1 each. Esquire uses level production, and average monthly production is equal to annual production divided by 12.

c. Determine a cash payments schedule for January through December. The production costs (\)1 per unit produced) are paid for in the month in which they occur. Other cash payments (besides those for production costs) are $7,400 per month.

Why might a firm keep a safety stock? What effect is it likely to have on carrying cost of inventory?

Postal Express has outlets throughout the world. It also keeps funds for transactions purposes in many foreign countries. Assume in 2010 it held 240,000 reals in Brazil worth 170,000 dollars. It drew 12 percent interest, but the Brazilian real declined 24 percent against the dollar.

b. What is the value of its holdings, based on U.S. dollars, at year-end if instead it drew 9 percent interest and the real went up by 13 percent against the dollar?

Under what circumstances would it be advisable to borrow money to take a cash discount?

What is the difference between pledging accounts receivable and factoring accounts receivable?
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