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

Required:

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

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

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

Transcribed Image Text:

Income Statements Company Name Keef Reef Number of Customers (a) 80 80 Sales Revenue (a x $250) $20,000 $20,000 Variable Cost (a x $200) Variable Cost (a x $0) Contribution Margin Fixed Cost Net Income 20,000 (16,000) $ 4,000 $ 4,000 N/A (16,000) 0 N/A 4,000