Using fixed cost as a competitive business strategy The following income statements illustrate di 1 answer below »

Using fixed cost as a competitive business strategy The following income statements illustrate different cost structures for two competing companies

Income Statements 

Company Name 

Sander

Norland

Number of Customers (a)

80

80

Sales Revenue (a  $250)

$20,000

$20,000

Variable Cost (a  $200)

                                       N/A

-16,000

Variable Cost (a  $0)

0

                                        N/A

Contribution Margin

20,000

4,000

Fixed Cost

-16,000

0

Net Income

$4,000

$4,000

Required

a. Reconstruct Sander’s income statement, assuming that it serves 160 customers when it lures 80 customers away from Norland by lowering the sales price to $150 per customer.

b. Reconstruct Norland’s income statement, assuming that it serves 160 customers when it lures 80 customers away from Sander by lowering the sales price to $150 per customer.

c. Explain why the price-cutting strategy increased Sander Company’s profits but caused a net loss for Norland Company.

 

 

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