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

Required

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

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

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

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Income Statements Company Name Rank Hank 80 Number of customers (a) Sales revenue (a X $250) Variable cost (a × $175) Variable cost (a × $0) 80 $20,000 N/A $20,000 (14,000) N/A Contribution margin Fixed cost 20,000 (14,000) 6,000 $ 6,000 $ 6,000 Net income