Answer a:
If the economy is strong,
Quantity of drives sold by the firm =2 million
Sales = Quantity sold * Price
= 2 million * $200 = $400 million
If there is a recession,
It will sell only half as many = 2/2 = 1 million
Sales = Quantity sold * Price
= 1 million * $200 = $200 million
Percentage decline in sales if the economy enters a recession =(400 - 200) /400 = 50%
Answer b:
Contribution per unit = Selling Price per unit - Variable cost per unit
= $200 - $140
= $60 per unit
Profit = (Contribution per unit * Quantity sold - Fixed cost) *(1 - Tax rate)
If the economy is strong,
Quantity of drives sold by the firm = 2 million
Profit = (60 * 2 - 30) * (1 - 30%)
= 90 * 0.7
=$63 million
If there is a recession,
It will sell only half as many = 2/2=1 million
Profit = (60 * 1 - 30) * (1 - 30%)
= $21 million
Percentage decline in profits if the economy enters a recession= (63 - 21) / 63 = 53.33333% = 66.67%
Answer c:
Operating leverage = % change in EBIT / % change in Sales.
If the economy is strong,
EBIT = (Contribution per unit *Quantity sold - Fixed cost)
= $60 * 2 - 30
= $90 million
If there is a recession,
EBIT = (Contribution per unit * Quantity sold - Fixed cost)
= $60 * 1 - 30
= $30 million
Percentage change in EBIT = (90 - 30) /90 = 66.67%
Operating leverage = 66.67% / 50% = 1.066667 =1.33
Check my work OceanGate sells external hard drives for $200 each. Its total fixed costs are...
Check my work OceanGate sells external hard drives for $200 each. Its total fixed costs are $30 million, and its variable costs per unit are $140. The corporate tax rate is 30%. If the economy is strong, the firm will sell 2 million drives, but if there is a recession, it will sell only half as many. a. What will be the percentage decline in sales of the economy enters a recession? 05:52) Percentage decline in sales % ences b....
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