Grant Company and Lee Company Compete in the Same Market

question 137

Essay

Grant Company and Lee Company compete in the same market.The following budgeted income statements illustrate their cost structures.
$\begin{array}{lrr}&\text { Grant } & \text { Lee } \\&\text { Company } & \text { Company }\\ \text { Number of customers } & 200 & 200 \\\text { Sales revenue }(200 \times \$ 150) & \$ 30,000& \$ 30,000 \\\text { Less variable costs } & 6,000& 18,000\\\text { Contribution margin } & \$ 24,000 & \$ 12,000 \\\text { Less fixed costs } & 19,000 & 7,000 \\\text { Net income } & \$ 5,00 0& \$ 5,000\end{array}$
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?

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Definitions:

Antifreeze

A liquid added to the water in a cooling system to lower its freezing point, commonly used in automobile engines.

Cooling System

A system designed to remove heat from an area or machinery, commonly using a fluid or air to transfer heat away.

Algebraic Expression

An algebraic expression is a mathematical phrase that can contain numbers, variables, and operation symbols, but no equality sign.

Ratio

A relationship between two numbers indicating how many times the first number contains the second.