Question

Atech has fixed costs of $12.0 million and profits of $5 million. Its competitor, ZTech, is roughly the same size and this year earned the same profits, $5 million. However, ZTech operates with fixed costs of $0.40 million and lower variable costs a. Calculate the operating leverage for each firm. (Round your answers to 2 decimal places.) DOL ATech DOL ZTech b. Which firm will likely have higher profits if the economy strengthens? ATech ZTech

Answer 1

Please provide rating...

Answer a)
	Operating leverage = Contribution margin/ Profit
				Atech		Ztech
	i	Fixed cost		12		0.4
	ii	Profit		5		5
	iii=i+ii	Contribution margin		17		5.4
	iv	Operating leverage		3.40		1.08
Answer b)
	If economy strengthen Atech will have higher profit as it has higher operating leverage ratio
	Answer =		Atech