PROBLEM#1: Assume two firms, Aand B, produce and sell widgets. Firm A uses a highly…

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PROBLEM#1:

Assume two firms, Aand B, produce and sell widgets. Firm A uses a highly automatedproduction process with robotic machines, whereas firm B assemblesthewidgets using primarily semi-skilled labor. Highly automatedfirm A has fixed costs of Rs. 35,000 per year and variable costs ofonly Rs. 1.00 per unit, whereaslabor-intensive firm B has fixedcosts of only Rs. 15,000 per year, but its variable cost per unitis much higher at Rs. 3.00 per unit. Both firms produce andsell10,000 widgets per year at a price of Rs. 5.00 perwidget.

REQUIRED:

(i) Whichfirm has a higher amount of operating leverage andwhy?

(ii) Howwill you interpret the breakeven point of the firm with highoperating leverage?

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