David Sharma sells masks, textiles, and other goods imported from Africa. David usually marks up his

David Sharma sells masks, textiles, and other goods imported from Africa. David usually marks up his purchases by 300% (that is, if he pays $10 for an item, he lists it at $40). His annual sales range from $1,400,000 to $1,700,000, with sales for the current year expected to be $1,500,000. He also incurs fixed costs related to the rental for his store, travel, and other items. Such fixed costs generally amount to $900,000 per year. Required: a. Suppose David anticipates sales of $1,700,000 next year. Calculate his expected profit for the current year and for next year, assuming that he does not change his pricing strategy. Use the contribution margin format. b. Suppose David anticipates sales of $2,800,000 next year because he expects African art to come into “fashion.” Calculate expected profit. The new level of fixed costs is $1,600,000. c. Why is it reasonable to think of fixed costs as being controllable when computing the answer for part (b) but not for part (a)? How might David reasonably estimate the “fixed” costs if he expects sales of $2,800,000 next year?

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