Suppose there are only two firms in the industry. Firm A has sales of 200,000 units at $3.00 per unit, variable operating costs of $1.8 per unit, and fixed operating costs of $8,000. Interest is $100,000 per year. Firm B has sales of 200,000 units at $3.5 per unit, variable operating costs of $1.5 per unit, and fixed operating costs of $120,000. Interest is $60,000 per year. Assume that the tax rate for both firms is 16%.

a. Calculate the degree of operating, financial and total leverage for Firm A. (5 marks)

b. Calculate the degree of operating, financial and total leverage for Firm B. (5 marks)

c. Compare the relative risks of the two firms. (2 marks)

d. Discuss the principles of leverage that your answers show. (3 marks)