Two Firms, a and B, Both Produce Widgets

question 32

Multiple Choice

Two firms, A and B, both produce widgets. The price of widgets is $1 each. Firm A has total fixed costs of $500,000 and variable costs of 50¢ per widget. Firm B has total fixed costs of $240,000 and variable costs of 75¢ per widget. The corporate tax rate is 40%. If the economy is strong, each firm will sell 1,200,000 widgets. If the economy enters a recession, each firm will sell 1,100,000 widgets. Calculate firm A's degree of operating leverage.

• A) 11.0
• B) 2.86
• C) 9.09
• D) 1.00

---

Definitions:

Contingency Plan

A prepared strategy or procedure designed to address possible future events or circumstances that may disrupt normal operations or require a swift response.

Monitoring

The process of systematically tracking performance or quality over time with the aim of making improvements.

Clarify Tasks

The process of making responsibilities, expectations, and tasks clear and understandable to ensure they are completed effectively.

Modify Policies

The process of updating or changing guidelines and rules to improve, adapt, or redefine organizational, institutional, or governmental operations.