Calculation of Prediction Error.

A company sets the price for its product at $300 per unit. Predicted variable costs are $175 per unit and fixed costs are expected to be $600,000 a year. Sales for the year are expected to be 8,000 units.

Required:

a. Determine the prediction error for net income if actual variable costs were $190 per unit.

All other predictions are correct.

b. Assume all predictions were correct, except that 11,000 units could have been sold at the $300 price if enough had been available. However, only 8,000 units were produced and sold. Determine the cost of the prediction error.

(SMA adapted)