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The following income statements illustrate different cost structures for two com

ID: 2471909 • Letter: T

Question

The following income statements illustrate different cost structures for two competing companies:

Reconstruct Kent’s income statement, assuming that it serves 172 customers when it lures 86 customers away from Trent by lowering the sales price to $150 per customer.

Sales revenue

Variable cost

Contribution margin

Fixed cost

Net income

Reconstruct Trent’s income statement, assuming that it serves 172 customers when it lures 86 customers away from Kent by lowering the sales price to $150 per customer.

Sales revenue

Variable cost

Contribution margin

Fixed cost

Net income

The following income statements illustrate different cost structures for two competing companies:

Company Name Kent Trent   Number of customers (a) 86 86   Sales revenue (a × $250) $ 21,500 $ 21,500   Variable cost (a × $185) N/A (15,910 )   Variable cost (a × $0) 0 N/A   Contribution margin 21,500 5,590   Fixed cost (15,910 ) 0   Net income $ 5,590 $ 5,590

Reconstruct Kent’s income statement, assuming that it serves 172 customers when it lures 86 customers away from Trent by lowering the sales price to $150 per customer.

Sales revenue

Variable cost

Contribution margin

Fixed cost

Net income

Reconstruct Trent’s income statement, assuming that it serves 172 customers when it lures 86 customers away from Kent by lowering the sales price to $150 per customer.

Sales revenue

Variable cost

Contribution margin

Fixed cost

Net income

Explanation / Answer

Answer a. Kent's Income Statement Sales Revenue (172 Customers X $150)           25,800 Variable Cost (172 Customers x $0)                     -   Contribution Margin           25,800 Fixed Costs         (15,910) Net Income              9,890 Answer b. Trent's Income Statement Sales Revenue (172 Customers X $150)           25,800 Variable Cost (172 Customers x $185)           31,820 Contribution Margin           (6,020) Fixed Costs                     -   Net Income           (6,020)