EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 17, Problem 26PS
a.
Summary Introduction
To evaluate: The firm having higher operating leverage.
Introduction:
Operating leverage: Normally, when analysis regarding growth of the company is done, details pertaining to two companies are compared. Operating leverage is one such measure to determine the degree to which a company or project can increase the operating income through increase of revenue. Experts suggest that a company which generate sales with high grows margin apart from maintaining low variable cost has high operating leverage.
b.
Summary Introduction
To evaluate: The firm having higher profits based on the strength of economy.
Introduction:
Operating leverage: Normally, when analysis regarding growth of the company is done, details pertaining to two companies are compared. Operating leverage is one such measure to determine the degree to which a company or project can increase the operating income through increase of revenue. Experts suggest that a company which generate sales with high grows margin apart from maintaining low variable cost has high operating leverage.
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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. However, ZTech operates with fixed costs of $5 million and lower variable costs.a. Which firm has higher operating leverage?b. Which firm will likely have higher profits if the economy strengthens?
ATech has fixed costs of $10.0 million and profits of $5 million. Its competitor, ZTech, is roughly the same size and this year earned the same profits, $5 million. However, ZTech operates with fixed costs of only $0.25 million but higher variable costs. Calculate the operating leverage for each firm.
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Chapter 17 Solutions
EBK INVESTMENTS
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