An Investment Has the Possibility of Earning $10,000, $8,000 or $2,000

question 17

Multiple Choice

An investment has the possibility of earning $10,000, $8,000 or $2,000 depending on the state of the economy that is prosperity, modern growth, and recession respectively. The probabilities of prosperity, moderate growth, and recession are .4, .3, and .3 respectively. The expected value of the investment is:

• A) $10,000.
• B) $21,000.
• C) $7,000.
• D) $3,000.
• E) $8,000.

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Definitions:

Predetermined Overhead Rates

A rate calculated before a period begins, used to estimate the manufacturing overhead costs that will be allocated to each unit of product.

Cost of Goods Sold

The total direct costs attributable to the production of the goods sold by a company, including material and labor costs.

Activity Rate

A measure used in cost accounting to allocate costs to products or services based on the activities required to produce them.

Estimated Cost

An approximation of the cost to produce goods or services, used for budgeting and planning.