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The following income statements illustrate different cost structures for two competing companies: Income Statements Company Name...

The following income statements illustrate different cost structures for two competing companies: Income Statements Company Name Munoz Jordan Number of customers (a) 85 85 Sales revenue (a × $230) $ 19,550 $ 19,550 Variable cost (a × $180) N/A (15,300 ) Variable cost (a × $0) 0 N/A Contribution margin 19,550 4,250 Fixed cost (15,300 ) 0 Net income $ 4,250 $ 4,250 Required Reconstruct Munoz’s income statement, assuming that it serves 170 customers when it lures 85 customers away from Jordan by lowering the sales price to $130 per customer. Reconstruct Jordan’s income statement, assuming that it serves 170 customers when it lures 85 customers away from Munoz by lowering the sales price to $130 per customer.

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Expert Solution

In case of Munoz, variable cost is zero. That means entire selling price will become the contribution margin. So, when we lower the selling price to 130, contribution margin will become 130. So, for break even it requires 15300/130 (fixed cost/contribution per unit) = 117.69 units = 118 units. So, at selling price 130, if it sells more than 118 units, it wont get any loss.

But, in case of Jordan, it has variable cost of 180 per unit. So, its selling price per unit should be more than 180, then only it will get any positive contribution and there by any profit. Otherwise, it will get losses. If it sells at 130 i.e. $50 less than the variable cost, it will get loss of $50 per unit. So, if it sells 170 units, then it will get loss of 170units*$50= $8500 loss.

Reconstructed Munoz’s income statement, assuming that it serves 170 customers when it lures 85 customers away from Jordan by lowering the sales price to $130 per customer.

Company Name

Munoz

Number of customers (a)

170

Sales revenue (a × $130)

$22,100

Variable cost (a × $180)

N/A

Variable cost (a × $0)

0

Contribution margin

22,100

Fixed cost

-15,300

Net income

$6,800

Reconstructed Jordan’s income statement, assuming that it serves 170 customers when it lures 85 customers away from Munoz by lowering the sales price to $130 per customer.

Company Name

Jordan

Number of customers (a)

170

Sales revenue (a × $130)

$22,100

Variable cost (a × $180)

-30,600

Variable cost (a × $0)

N/A

Contribution margin

-8,500

Fixed cost

0

Net income

($8,500)

ekkarill92 answered 1 year ago
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