Equillion, Inc. and Stoichran, Inc. are two companies in the pharmaceutical industry. Equillion has relatively high fixed costs related to research and development. Stoichran, however, does little research and development. Instead, the company pays for the right to produce and market drugs that have been developed by other companies. The amount paid is a percent of sales. Thus, Stoichran has relatively high variable costs and relatively low fixed costs.
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Required:
a. Which company has the higher operating leverage?
b. Calculate the expected percentage change in profit for a 20 percent increase (and for a 20 percent decrease) in sales for each company. (Round to the nearest percentage.)
c. Which company is more risky?