Answer:
What is the firm's degree of operating leverage?
the degree of operating leverage measures the proportion of fixed costs vs. variable costs
total fixed costs = $30,000,000
contribution margin per hard drive = selling price - variable cost = $200 - $140 = $60
tax rate = 30%
expected sales = 2,000,000 hard drives
degree of operating leverage = contribution margin / (total sales - total costs) = (2,000,000 x $60) / ($400,000,000 - $280,000,000 - $30,000,000) = $120,000,000 / $90,000,000 = 1.33
DOL = 1.33
If the economy enters a recession, what will be the firm's after tax profit?
firm's EBIT = total revenue - variable costs - fixed costs
- total revenue = 1,000,000 x $200 = $200,000,000
- total variable costs = 1,000,000 x $140 = $140,000,000
- total fixed costs = $30,000,000
EBIT = $200,000,000 - $140,000,000 - $30,000,000 = $30,000,000
firm's after tax profit = EBIT x (1 - tax rate) = $30,000,000 x (1 - 30%) = $21,000,000
firm's after tax profit = $21,000,000
