Grant Company and Lee Company compete in the same market. The following budgeted income statements illustrate their cost structures. Grant Company Lee CompanyNumber of customers 200 200 Sales revenue (200 × $150)$30,000 $30,000 Less variable costs 6,000 18,000 Contribution margin$24,000 $12,000 Less fixed costs 19,000 7,000 Net income$5,000 $5,000 Required: (a) If Grant Company lowers its price to $135, it will lure 80 customers away from Lee Company. Prepare Grant's income statement based on 280 customers.(b) If Lee Company lowers its price to $135 (assuming that Grant Company is still charging $150 per customer), Lee would lure 80 customers away from Grant. Prepare Lee's income statement based on 280 customers.(c) Which of the companies would
benefit more from lowering its sales price to attract more customers, and why?
What will be an ideal response?
(a) Grant Company income statement
| Number of customers | 280 | ||
| Sales revenue (280 × $135) | $ | 37,800 | |
| Less variable costs (30 × $280) | 8,400 | ||
| Contribution margin | $ | 29,400 | |
| Less fixed costs | 19,000 | ||
| Net income | $ | 10,400 | |
(b) Lee Company income statement
| Number of customers | 280 | ||
| Sales revenue (280 × $135) | $ | 37,800 | |
| Less variable costs (90 × $280) | 25,200 | ||
| Contribution margin | $ | 12,600 | |
| Less fixed costs | 7,000 | ||
| Net income | $ | 5,600 |
(c) Grant Company would benefit more from lowering its sales price to attract new customers; its income would increase by $5,400, while in the same circumstances, Lee's income would increase by just $600. The difference is caused by the companies' cost structures: Grant has a cost structure with more fixed costs, and Lee has higher variable costs. Therefore, the increase in sales (at a lower selling price) causes more of an increase in Grant's contribution margin and net income.
You might also like to view...
A direct cost is one that is directly attributable to the system or the system change, such as reduced overhead costs
Indicate whether the statement is true or false
An accord is an agreement by parties to a contract to give and accept some performance different from that originally bargained for
a. True b. False Indicate whether the statement is true or false
Innkeepers. Augustine attended a dental seminar held at a Marriott Hotel. The sponsor of the seminar had rented the banquet room in which the seminar was held and had requested the hotel to place a movable coat rack outside the room, in the public
lobby. Augustine placed his coat on the rack before entering the seminar room. When he tried to find the coat at the noon recess, however, he noted that the rack had been moved a distance down the lobby and around a corner, near an exit. To his dismay, his cashmere coat was missing. Claiming that the hotel was liable for the loss, Augustine brought an action against it. Was the hotel a bailee of the coat and thus liable to its owner for the loss? Explain fully.
The Project software oversees all project activities and makes sure that the project stays within its scope
Indicate whether the statement is true or false