Question

Dave's Mirror Company expects to sell $1,000,000 worth of mirrors and to produce $1,400,000 worth of mirrors in the coming year. The company plans to and does purchase $500,000 of new equipment during the year. Sales for the year turn out to be $1,200,000. Actual investment by Dave's Mirror Company equals _____ and planned investment equals _______.

Answer 1

Dave's Mirror Company's actual investment is the sum of the unsold inventory ($200,000) and the new equipment purchased ($500,000), totaling $700,000. The planned investment was the initial amount intended for new equipment purchases, $500,000.

Step-by-step explanation:

Actual investment by Dave's Mirror Company is the sum of unsold inventory plus the amount spent on new equipment. Since Dave’s Mirror Company produced mirrors worth $1,400,000 but sold only $1,200,000, it has an unsold inventory worth $200,000 ($1,400,000 produced - $1,200,000 sold). Adding the value of new equipment purchased ($500,000), the total actual investment is $700,000.

Planned investment is initially what Dave’s Mirror Company intended to spend on new equipment, which is $500,000, as there are no details of any intention to hold any inventory; the unsold inventory likely resulted from sales being different than expected.