Question

A large multinational shipping company, AhoySales, Inc. has just decided to spend €10 million on new storage space in Munich, €45 million on new aircraft, and €5 million on additional acquisition of kerosene. In addition to these expenses, the company is producing 5 million parcels at a price of €5 per parcel. Now suppose that AhoySales plans to have a tenth of that production in inventory. Over time, the company’s parcels have met with increasing demand, but the inventory has only increased by €1 million. a. What is this firm’s total planned investment? b. How much did the firm actually invest? c. What is the difference between actual and planned investment? Should AhoySales produce more or fewer parcels? Why?

Answer 1

Answer:a

planned investment is how much Ahoy Sales has decided to plan in a given period (year or month)

So, planned investment = €10 million on new storage space in Munich + €45 million on new aircraft + €5 million on additional acquisition of kerosene + € 2.5 million on inventory

( inventory = 10 % of production

production = 5 million * €5 per parcel =   € 25 million

inventory = € 25 million * 10 / 100 = € 2.5 million )

planned investment = € 62.5 million

answer: b

actual investment is how much Ahoy Sales has invested in the given period

So, actual investment = €10 million on new storage space in Munich + €45 million on new aircraft + €5 million on additional acquisition of kerosene + € 1 million on inventory

(€ 1 million on inventory is given)

actual investment = € 61 million.

answer: c:

the difference between planned investment and actual investment is = € 62.5 million - € 61 million

= € 1.5 million

Ahoy Sales should produce more because it actual investment is less than planned investment