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Q.33C

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Essentials Of Investments
Found in: Page 400
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

Short Answer

OceanGate sells external hard drives for $200 each. Its total fixed costs are $30 million, and its variable costs per unit are $140. The corporate tax rate is 30%. If the economy is strong, the firm will sell 2 million drives, but if there is a recession, it will sell only half as many. What is the firm’s degree of operating leverage? If the economy enters a recession, what will be the firm’s after-tax profit?

Answer

Net profit = 63 and 21

DOL= 2.00

See the step by step solution

Step by Step Solution

Step by Step Solution Step 1: Given information

Normal sale = 2 million

Recession sale = 1 million

Price = $200 per unit

Variable cost = $140 per unit

Step 1: Calculation of after tax profit (net income)

Step 2: Calculation of degree of operating leverage

Since percentage change in sales and percentage change of profit = 100%

So, Degree of Operating leverage = 200/100 = 2.00

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