Firm R has sales of 96,000 units at 1.98 per unit, variable operating cost of $1.73 per unit, and fixed operating cost of $6,010. Interest is $10,060 per year. Firm W has sales of 96,000 units at $2.55 per unit, variable operating cost of $0.99 per unit, and fixed operating cost of $62,400. Interest is $17,700 per year. Assuming that both firms are in the 40% tax bracket.

Compute the degree of operating, financial, and total leverage for the firm R.

Compute the degree of operating, financial, and total leverage for firm W.

Compare the relative risk of the two firms.

Discuss the principles of leverage that your answers illustrate.