OceanGate sells external hard drives for $270 each. Its total fixed costs are $50 million, and...

OceanGate sells external hard drives for $270 each. Its total fixed costs are $50 million, and its variable costs per unit are $220. The corporate tax rate is 30%. If the economy is strong, the firm will sell 2 million drives, but if there is a recession, it will sell only half as many.

a. What will be the percentage decline in sales if the economy enters a recession?

b. What will be the percentage decline in profits if the economy enters a recession?

c. Comparing your answers to (a) and (b), how would you measure the operating leverage of this firm?

Solutions

Expert Solution

a) Percentage decline in sales is 50%

b) Percentage decline in profit is 100%

c) Degree of operating leverage is 2.

jeff jeffy answered 1 year ago

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