Question
OceanGate sells external hard drives for $220 each. Its total fixed costs are $40 million, and its variable costs per unit are $180. The corporate
OceanGate sells external hard drives for $220 each. Its total fixed costs are $40 million, and its variable costs per unit are $180. The corporate tax rate is 30%. If the economy is strong, the firm will sell 4 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?
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Foundations of Finance The Logic and Practice of Financial Management
Authors: Arthur J. Keown, John D. Martin, J. William Petty
8th edition
132994879, 978-0132994873
