OceanGate sells external hard drives for $280 each. Its total fixed costs are $50 million, and...

OceanGate sells external hard drives for $280 each. Its total fixed costs are $50 million, and its variable costs per unit are $210. The corporate tax rate is 30%. If the economy is strong, the firm will sell 8 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?

Expert Solution

jeff jeffy answered 1 year ago

OceanGate sells external hard drives for $280 each. Its total fixed costs are $30 million, and...

OceanGate sells external hard drives for $280 each. Its total fixed costs are $30 million, and its variable costs per unit are $230. 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 is the firm's degree of operating leverage (defined as the ratio of the percent change in EBIT to the percent change in sales) in...

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

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