Suppose the low leverage firm in Figure 14.6a has fixed costs of $1,000 per period, sells its product for $10, and has variable costs of $8 per unit. Further suppose that the high leverage firm in Figure 14.6b has fixed costs of $1,500 and also sells product for $10 a unit.
The diagram shows the breakeven volumes for the two firms to be the same. What variable cost per unit must the high leverage firm have if it is to achieve the same breakeven point as the low leverage firm? State the trade-off at the breakeven point. Which structure is preferred if there’s a choice?