Understanding Cost Behavior and Implications of Relevant Range
Refer to the information for Tweety Company in E5-1. Tweety Company’s owner, Sylvester, believes that he can sell 2,000 birdbaths during the month of April and has predicted a contribution margin income of $16,320 as shown in the following contribution margin statement:
TWEETY COMPANY Contribution Margin Income Statement Expected for 2,000 Units | |
Sales Revenue (2,000 × $20.00) | $40,000 |
Less: Variable Costs (2,000 × $9.75) | 19,500 |
Contribution Margin (2,000 × $10.25) | $20,500 |
Less: Fixed Costs | 4,180 |
Income from Operations | $16,320 |
Required:
Explain to Sylvester why his prediction is incorrect. Be specific about his incorrect assumptions and give him as much detail as possible about what the accurate contribution margin statement would show.
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