Question

Help Save & Exit Submit Check my work OceanGate sells external hard drives for $280 each. Its total fixed costs are $40 million, and its variable costs per unit are $230. 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 if the economy enters a recession? Percentage decline in sales b. What will be the percentage decline in profits if the economy enters a recession? Percentage decline in sales 83 % < Prev 6 of 17 # Next > 11/13 and Windows

Answer 1

Profit when economy is strong. contribution margin = 280-230 = $50l drive Salo contribution - 2000000 drives x so Fixed costs 100000000 (40oooooo) Profit $ 60000000 sales when conomy es strong $280 X 2000000 = $580 000 000 when ccomomy Ýs in orecession $280 X 1000000 = 80.000000 © Percentage decline in 150% , because sales it is sells only half 1 Profit in recession is 980000000-230 000 000 - 00000000 $ 10000000 Decline in profit percentage is 83.33./.. 60000000 - 10000000 x 100 1600000 0 0

operating leverage is calculated by Percentage change in Profit Percentage change in sales 83.33 / 50% = 1.67 times