Question: Firm R has sales of 105,000 units at $2.03 per unit, variable operating costs of $1.66 per unit, and fixed operating costs of $6,070.
Interest is $10,180 per year.
Firm W has sales of 105,000 units at $2.57 per unit, variable operating costs of $0.98 per unit, and fixed operating costs of $62,600.
Interest is $17,600 per year.
Assume that both firms are in the 40% tax bracket.
a. Compute the degree of operating, financial, and total leverage for firm R.
b. Compute the degree of operating, financial, and total leverage for firm W.
c. Compare the relative risks of the two firms.
d. Discuss the principles of leverage that your answers illustrate.