Grant Company and Lee Company Compete in the Same Market

question 82

Essay

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

Experience

The knowledge or skill acquired by a period of practical involvement in or exposure to events or activities.

Units Produced

The total quantity of products manufactured or produced by a company or an industry within a specific period.

Variable Cost Function

A mathematical representation of the variable costs incurred by a firm, showing how these costs change with the level of output.

Marginal Cost Curve

A graphical representation of the change in total production costs with respect to the change in the quantity produced.