Acc543 Managerial Accounting: E15-12B Logan and Martin compete in the same market

Acc543 Managerial Accounting 
Exercise 15-12B Effect of cost structure on projected profits 
Logan and Martin compete in the same market. The following budgeted income statements illustrate their cost structures. 
Income Statements 
Company 
Logan Martin 
Number of customers (a) 100 100 
Sales revenue (a x $100) 10,000 10,000 
Variable cost (a x $64) N/A 6,400 
Contribution margin 10,000 3,600 
Fixed costs (6,400) N/A 
Net income $3,600 $3,600 

Required 
a. Assume that Logan can lure all 80 customers away from Martin by lowering its sales price to $75 per customer. Reconstruct Logan’s income statement based on 160 customers. 
b. Assume that Martin can lure all 80 customers away from Logan by lowering its sales price to $75 per customer. Reconstruct Martin’s income statement based on 160 customers. 
c. Why does the price-cutting strategy increase Logan’s profits but result in a net loss for Martin?
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