Firm R has sales of 103,000 units at $1.98 per unit, variable operating costs of $1.69 per unit, and fixed operating costs of
1 answer:
Answer:
degree of operating R = 1.25
degree of financial = 1.51
total leverage for firm R = 1.88
degree of operating W = −4.98
degree of financial W = 13.05
total leverage for firm W = −64.989
Finance risk is more for Firm W as it has more interest to pay
Leverage is the use of fixed costs in a company’s cost structure.
Explanation:
given data
R sales = 103,000 units
sales cost = $1.98 per unit
fixed operating costs = $6,010
Interest = $10,130 per year
W sales = 103,000 units
sales cost = $2.54 per unit
variable operating costs = $0.96 per unit
fixed operating costs = $62,500
Interest = $17,400 per year
tax bracket. = 40%
solution
degree of operating R =
degree of operating R = 1.25
and
degree of financial =
degree of financial R = 1.51
and
total leverage for firm R = 1.25 × 1.51
total leverage for firm R = 1.88
and
degree of operating W =
degree of operating W = −4.98
and
degree of financial W =
degree of financial W = 13.05
and
total leverage for firm W = -4.98 × 13.05
total leverage for firm W = −64.989
and
Firm W has more fixed costs and therefore more operational risk.
and for overcome risk it have to achieve profit by increasing sales price and reduce variable operating cost.
so
Finance risk is more for Firm W as it has more interest to pay
and
Leverage is the use of fixed costs in a company’s cost structure.
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