Grant Company and Lee Company Compete in the Same Market

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?