Standard and Variant compete in the same market. The following budgeted income statements illustrate their cost structures:
Income Statements
Company
Standard Variant
Number of customers (a)...............................150......................150
Sales revenue (a × $160)..........................$24,000................$24,000
Variable cost (a × $90).................................N/A................(13,500)
Contribution margin.................................24,000..................10,500
Fixed costs..........................................(13,500).....................N/A
Net income.........................................$10,500.................$10,500
Required
a. Assume that Standard can lure all 150 customers away from Variant by lowering its sales price to $85 per customer. Reconstruct Standard's income statement based on 300 customers.
b. Assume that Variant can lure all 150 customers away from Standard by lowering its sales price to $85 per customer. Reconstruct Variant's income statement based on 300 customers.
c. Why does the price-cutting strategy increase Standard's profits but result in a net loss for Variant?