(a)
To compute:
The percentage decline in sales, if the economy enters a recession, for the Ocean gate who sells hard drives for
Introduction:
Operating leverage means a relationship between fixed and variable costs. A business which has a higher contribution margin and lower variable cost have high operating leverage.
If the economy enters s recession, then, the prices of product get high and sales starts a decline.
Answer to Problem 27PS
The percentage decline in sales is
Explanation of Solution
Given:
At the time of recession, it will sell only half of the sale volume.
Sales in a strong economy is
Sales in recession is
Sale price per unit is
If the economy enters a recession, then, the prices of product get high and sales starts declining.
Here,
In a recession,
In a strong economy,
Hence,
So, percentage decline in sales is
(b)
To determine:
The percentage decline in sales, if the economy enters a recession, for the Ocean gate who sells hard drives for
Introduction:
Operating leverage means a relationship between fixed and variable costs. A business which has a higher contribution margin and lower variable cost have high operating leverage.
The economy drops down at the time of recession. So, the profit with high operating leverage firm will reduce drastically.
Answer to Problem 27PS
The percentage decline in profits is
Explanation of Solution
Given:
At the time of recession, it will sell only half of the sale volume.
Sales in a strong economy is
Sales in recession is
Sale price per unit is
Variable cost per unit is
Fixed Cost is
Corporate tax is
If the economy enters recession prices of product gets high and profit will get reduced.
Here,
In a recession economy,
In a strong economy,
Now,
So, percentage decline in profit is
(c)
To determine:
By comparing decline in sales and decline in profits, measure the operating leverage of the Ocean gate who sells hard drives for
Introduction:
Operating leverage means a relationship between fixed and variable costs. A business which has a higher contribution margin and lower variable cost have high operating leverage.
Answer to Problem 27PS
The operating leverage of the firm is high as change in profit is higher than the change in sales.
Explanation of Solution
So, operating leverage of firm is 2
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Chapter 17 Solutions
EBK INVESTMENTS
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