Question

Jeremy and Justine work for a company that sells teddy bears. They receive $45 for each teddy bear sold. The company has a variable cost of $25 per teddy bear and a fixed cost of $1600.

Jeremy made the following prediction based on the revenue and expense conditions.




Explain why Jeremy's prediction is incorrect. Provide a justification.


Enter your answer and your work or explanation in the space provided.

Answer 1

Jeremy's prediction is incorrect because he did not consider the fixed costs associated with running the business when calculating the profit.

Step-by-step explanation:

In this scenario, Jeremy predicted the company's profit based solely on the revenue and expense conditions. However, his prediction is incorrect because he did not factor in the fixed costs associated with running the business. Fixed costs are expenses that do not change with the number of teddy bears sold, such as rent, salaries, and utilities.

To calculate the profit, we need to subtract the total variable costs (cost per teddy bear multiplied by the number of teddy bears sold) and the fixed costs from the revenue. If the result is positive, it indicates a profit; if it's negative, it indicates a loss.

In Jeremy's prediction, the fixed costs of $1600 were not deducted from the revenue, resulting in an inaccurate estimation of the company's profit.