Question

Dave's Mirror Company expects to sell $1,000,000 worth of mirrors while producing $1,500,000 worth of mirrors in the coming year. The company plans to, and does, purchase $200,000 of new equipment during the year. Sales for the year turn out to be $800,000. Planned investment by Dave's Mirror Company equals _____ and actual investment equals _____.

Answer 1

Dave's Mirror Company had planned investments totaling $700,000 and actual investments amounted to $900,000 due to lower than expected sales resulting in larger increase in inventories, plus the purchase of new equipment.

Step-by-step explanation:

Planned investment by Dave's Mirror Company equals the sum of new capital expenditure and the change in inventories. Since the company planned to produce mirrors worth $1,500,000 and expected to sell $1,000,000, the planned increase in inventories is $500,000 ($1,500,000 - $1,000,000). Adding the purchase of new equipment worth $200,000, planned investment totals $700,000 ($500,000 + $200,000).

Actual investment also comprises new capital expenditure and the actual change in inventories. However, since sales were only $800,000, the actual increase in inventories becomes $700,000 ($1,500,000 production - $800,000 sales). Therefore, actual investment is $900,000 ($700,000 + $200,000).