3-15 Prediction Error. Channels of Distribution Through the end of 19-3, Mavis Company, a television manufacturer, had always sold its products through dis- tributors. In 193 its sales were $50,000,000 and its net income was 10 percent of sales. Total fixed expenses (manufacturing and selling) were $10,000,000. During 19.3 a number of Mavis' competitors had begun selling their units through discount houses and huge outlets. Mavis' marketing research group was asked to predict the effects of eliminating distributors from Mavis' chan- nels of distribution and selling directly to retailers. The group was instructed to predict both changes in sales volume and changes in selling expenses, under the provision that the selling price per unit would remain unchanged. The marketing analysis yielded the following predictions. Total sales dollars in 19.4 would drop 20 percent from the 19.3 figures, but net income for 19-4 would rise to $5,200,000 owing to savings in selling expenses. This net savings in selling expenses from eliminating the "middleman" was impres- sive, since total fixed expenses (manufacturing and selling) would increase to $10,800,000 because of the additional warehouse and delivery facilities. required. If the 19-3 distribution system were continued, however, 19_4 results would replicate 19.3. 1. What was the breakeven point (in sales dollars) under the original situation prevailing in 19_3? 2. What would be the breakeven point (in sales dollars) under the proposed situation for 19.4? 3. On the basis of this analysis, Mavis adopted the new direct-distribution plan for 19-4, and reduced 19-4 production to the 40,000,000-sales-dollar level. Unfortunately, it became clear by early December of 19-4 that sales would reach only $38,000,000, and Mavis cut back production so that no ending inventory remained. Variable costs per unit and total fixed costs were as pre- dicted. Compute the cost of Mavis' prediction error.