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

Required
a. Reconstruct Hill's income statement, assuming that it serves 400 customers when it lures 200 customers away from Creek by lowering the sales price to $120 per customer.
b. Reconstruct Creek's income statement, assuming that it serves 400 customers when it lures 200 customers away from Hill by lowering the sales price to $120 per customer.
c. Explain why the price-cutting strategy increased Hill Company's profits but caused a net loss for Creek Company.

Transcribed Image Text:

Income Statements Company Name Hill Creek Number of customers (a) Sales revenue (a × $200) Variable cost (a × $ 140) Variable cost (a $0) Contribution margin Fixed cost Net income 200 $40,000 (28,000) N/A 12,000 200 $40,000 N/A 40,000 28,000) $12,000 $12,000