Which firm has higher operating leverage

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Provide full calculations and explanations for all questions. Please do not use excel to answer.

1. 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? And why?

B) Which firm will likely have higher profits if the economy strengthens? And why?

2. Consider two firms producing smartphones. One uses a highly automated robotics process, whereas the other uses workers on an assembly line and pays overtime when there is heavy production demand.

A) Which firm will have higher profits in a recession?

B) In a boom?

C) Which firm's stock will have a higher beta?

Reference no: EM133121732

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