13-4 (Forecasting revenues using scenario analysis) Floating Homes, Inc. is a ma
ID: 2649665 • Letter: 1
Question
13-4
(Forecasting revenues using scenario analysis) Floating Homes, Inc. is a manufacturer of luxury pontoon and house boats that sell for $40,000 to $100,000. To estimate its revenues for the following year, Floating Homes divides its boat sales into three categories based on selling price (high, medium, and low) and estimates the number of units it expects to sell under three different economic scenarios. These scenarios include a recession (Scenario I), a continuation of current conditions in which the economy is level (Scenario II), and a strong economy (Scenario III). These estimates are given below:
Scenario I
Recession)
Scenario II (Level Economy)
Scenario III (Strong Economy)
Probability
25%
50%
25%
High-Priced Boats Category
Unit sales
50
400
1,000
Average price per unit
$90,000
$90,000
$90,000
Medium-Priced Boats Category
Unit sales
100
800
3,000
Average price per unit
$70,000
$70,000
$70,000
Low-Priced Boats Category
Unit sales
200
1,500
5,000
Average price per unit
$50,000
$50,000
$50,000
Using these estimates, calculate the expected revenue for Floating Homes, Inc. for the following year.
Scenario I
Recession)
Scenario II (Level Economy)
Scenario III (Strong Economy)
Probability
25%
50%
25%
High-Priced Boats Category
Unit sales
50
400
1,000
Average price per unit
$90,000
$90,000
$90,000
Medium-Priced Boats Category
Unit sales
100
800
3,000
Average price per unit
$70,000
$70,000
$70,000
Low-Priced Boats Category
Unit sales
200
1,500
5,000
Average price per unit
$50,000
$50,000
$50,000
Explanation / Answer
High-Priced Boats Category
Expected Unit sales = Probability at Scenario I Recession*Unit sales inScenario I Recession + Probability at Scenario II Level Economy* Unit sales inScenario III Level Economy+ Probability at Scenario III Strong Economy*Unit sales in Scenario III Strong Economy
Expected Unit sales = 25%*50 + 50%*400 + 25%*1000
Expected Unit sales = 462.50 Unit
Average price per unit = $ 90000
Sale Value = Expected Unit sales *Average price per unit
Sale Value = 462.50*90000
Sale Value = $ 41,625,000
Medium-Priced Boats Category
Expected Unit sales = Probability at Scenario I Recession*Unit sales inScenario I Recession + Probability at Scenario II Level Economy* Unit sales inScenario III Level Economy+ Probability at Scenario III Strong Economy*Unit sales in Scenario III Strong Economy
Expected Unit sales = 25%*100 + 50%*800 + 25%*1000
Expected Unit sales = 675 Unit
Average price per unit = $ 70000
Sale Value = Expected Unit sales *Average price per unit
Sale Value = 675*70000
Sale Value = $ 47,250,000
Low-Priced Boats Category
Expected Unit sales = Probability at Scenario I Recession*Unit sales inScenario I Recession + Probability at Scenario II Level Economy* Unit sales inScenario III Level Economy+ Probability at Scenario III Strong Economy*Unit sales in Scenario III Strong Economy
Expected Unit sales = 25%*200 + 50%*1500 + 25%*5000
Expected Unit sales = 2050 Unit
Average price per unit = $ 50000
Sale Value = Expected Unit sales *Average price per unit
Sale Value = 2050*50000
Sale Value = $ 102,500,000
The expected revenue for Floating Homes, Inc = Sale Value at High-Priced Boats Category + Sale Value at Medium-Priced Boats Category + Sale Value at Low-Priced Boats Category
The expected revenue for Floating Homes, Inc = 41625000 + 47250000 + 102500000
The expected revenue for Floating Homes, Inc = $ 191,375,000
Answer
The expected revenue for Floating Homes, Inc = $ 191,375,000
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