Company A and Company B are both selling 2 5 million
Company A and Company B are both selling $2.5 million worth of goods. Company A’s PV ratio is 0.40 while B’s is 0.60. Company B’s fixed costs are $1 million, which puts the business at a competitive disadvantage versus A, which has $500,000 in fixed costs.

1. On the basis of the above information, if revenues were to increase by 20% for both businesses next year, how much profit before taxes would each generate?
2. On the basis of the above information, if revenues were to decrease by 20% for both businesses next year, how much profit before taxes would each generate?
3. Because of the varying cost structures, discuss the implications that the PV ratio has on both companies’ profit performance.

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