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    Income Statement and Variable Costs

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    The attached file shows the question and solution, with explanations for each step of the process of computing net income and the various revenue and cost components calculated and used in determine net income for all scenarios.

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    Solution Preview

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

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

    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 $150 per customer. (Leave no cells blank - be certain to enter "0" wherever required. Amounts to be deducted and loss amounts should be indicated with a minus sign. Omit the "$" sign in your response.)

    Sales revenue is equal to the sales price per unit multiplied by the number of units sold. In this case, the number of units sold is represented by the number of customers.

    Sales revenue = 160 customers * $150/customer = $24,000

    Variable costs (VC) are those costs that vary in direct proportion to production or number of customers demanding the good or service that the company is offering. Variable costs per unit remain constant however the total variable cost will increase as production or number of customers increases.

    Contribution margin is equal to sales revenue minus variable costs. We see above that Hank has a contribution margin equal to its sales revenue. Therefore we can use simple algebra to ...

    Solution Summary

    The question gives a few scenarios with different costing structures in terms of variable and fixed costs and asks for a computation of net income for each scenario. This shows the impact of the different costs on the bottom line.