Question

Two firms, A and B, both produce brushes. The price of brushes is $1.75 each. Firm A has total fixed costs of $451,100 and variable costs of 59 cents per brush. Firm B has total fixed costs of $261,100 and variable costs of 83 cents per brush. The corporate tax rate is 35%. If the economy is strong, each firm will sell 1,511,000 brushes. If the economy enters a recession, each firm will sell 974,500 brushes.

Calculate Firm B's degree of operating leverage. (Round your answer to 2 decimal places.)

Answer 1

Degree of operating leverage for B = Quantity*(Price- variable cost)/(Quantity*(price - variable cost) - Fixed cost) Assuming the probability of strong economy and recession both are same Quantity = (0.5*1511000 +0.5*974500) 1,242,750.00 degree of operating leverage= 1242750*(1.75-0.83)/(1242750*(1.75-0.83) -261100) 1.30