Company A has fixed costs of $9 million and profits of $6 million. Its competitor, Company B, is roughly the same size and this year earned the same profits, $6 million. But it operates with higher fixed costs of $10 million and lower variable costs. What is the degree of operating leverage (DOL) for each company? (Defined here as 1 + Fixed costs/Profit.) Which firm has higher operating leverage?

Which firm will likely have higher profits if the economy strengthens?