OceanGate sells external hard drives for $230 each. Its total fixed costs are $3

Question

OceanGate sells external hard drives for $230 each. Its total fixed costs are $30 million, and its variable costs per unit are $190. 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.)

Explanation / Answer

IF sale is 4 million, total revenue= 4*230=920 Million

Sales- variable cost- fixed cost=EBIT

920-190*4-30

EBIT=130Million

If there is a recession,2 million hard drives will be sold

Revenue= 2*230=460 Million

EBIT= 460-190*2-30

EBIT=50 million

%change in EBIT= (50-130)/130

=-61.54%

DOL= %change in EBIT/%change in Sales

= -61.54%/50%

DOL=-1.23

b.

In case recesion

EBIT= 50

Tax@30%= 50*30%=15

After tax profit=50-15

After tax profit=35 Million

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