OceanGate sells external hard drives for $220 each. Its total fixed costs are $5
ID: 2762361 • Letter: O
Question
OceanGate sells external hard drives for $220 each. Its total fixed costs are $50 million, and its variable costs per unit are $180. The corporate tax rate is 30%. If the economy is strong, the firm will sell 5 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 $220 each. Its total fixed costs are $50 million, and its variable costs per unit are $180. The corporate tax rate is 30%. If the economy is strong, the firm will sell 5 million drives, but if there is a recession, it will sell only half as many.
Explanation / Answer
Sales [5000000 * 220] 1100000000
less: variable expenses[5000000*180] (900000000)
Contribution 200000000
less: Fixed expenses (50000000)
Operating profit 150000000
less: Tax @30% (45000000)
Profit after tax 105000000.
Degree of operating leverage = change in EBIT / Change in sales
= 150000000 / 1100000000
= 0.1364 or 13.64%.
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