Your image looks normal to me. For reflowable books the Kindle app reserves screen space for the title on top, status info on the bottom, and margins on the sides. The usable space to display your book content is reduced by that amount. As far as I know only fixed-layout books are able to display images full-screen.
It looks like your content would be well suited to fixed-layout Children's book formatting. See chapter 10 of the
Amazon Kindle Publishing Guidelines for more information.
(PS: You may want to ask to have this thread moved to the Kindle formats forum since the issue has more to do with Kindle than EPUB.)