ATech has fixed costs of $7 million and profits of $4 million. Its competitor, ZTech, is roughly the same size and this year earned the same profits, $4 million. But it operates with higher fixed costs of $8 million and lower variable costs.

a. Which firm has higher operating leverage

b. Which firm will likely have higher profits if the economy strengthens?

Question

Jacquelyn Morton

Business

19 April, 14:58

ATech has fixed costs of $7 million and profits of $4 million. Its competitor, ZTech, is roughly the same size and this year earned the same profits, $4 million. But it operates with higher fixed costs of $8 million and lower variable costs.

a. Which firm has higher operating leverage

b. Which firm will likely have higher profits if the economy strengthens?

+1

Answers (1)

Know the Answer?

Myah Harrison · Answer 1

a. ZTech will have a higher operating leverage because it has a higher fixed cost.

b. ZTech will have a higher profit since it has a higher operating leverage if the economy strengthens.

Explanation:

Operating leverage measures the the extent to which a firm uses fixed cost to finance its operations. The higher the fixed cost, the higher the degree of operating leverage

If the economy strengthens, the firm with a higher degree of operating leverage earns a higher profit.