OceanGate sells external hard drives for $350 each. Its total fixed costs are $6
ID: 2723665 • Letter: O
Question
OceanGate sells external hard drives for $350 each. Its total fixed costs are $60 million, and its variable costs per unit are $290. 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.
What is the firms' degree of operating leverage (defined as the ratio of the percent change in EBIT to the percent change in sales)?
If the economy enters a recession, what will be the firm’s after-tax profit? (Enter your answer in millions.)
OceanGate sells external hard drives for $350 each. Its total fixed costs are $60 million, and its variable costs per unit are $290. 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.
Explanation / Answer
Degree of operating leverage= change in operating income/ change in sales
Operating Income when sales 4m (strong)
units sale = 4,000,000 selling price= $ 350 sales= 1400,000,000-1160,000,000(VC 4m*$350)-60,000,000=
$ 180,000,000
Recesion i.e sales 2 units= sales 2,000,000*$ 350= 7000,000,000-$ 580,000,000(VC 2m*$ 350)-60,000,000=
$ 60,000,000
percentage change in sales (decrease) 50% (4m-2m=2m/4m*100)
percentage change in opearting income= 60,000,000/180,000,000*100= 33.33%
A)Degree of operating leverage=33.33/50=0.67
B) After tax profit in recession= prift in recession = $ 60,000,000
tax rate =30% formula = operating profit (1-tax)
$60,000,000(1-0.30) => $ 60,000,000*0.70=$42,000,000
=
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