Question

3. The following are the details of a firm:
Particulars Amount ( )
Sales 85,00,000
Variable Cost 52,00,000
Fixed Cost 7,00,000
Debts 55,00,000 (9%)
Equity Capital 65,00,000
Calculate its operating, financial and combined leverage.
What will be its new EBIT if sales drop to `60,00,000.

Answer 1

Explanation:

' zkon zlz on zlol 5't.rzzl zzon zzon z

Answer 2

Solution:

Given,  

Sales = 85, 00,000

Variable Cost = 52, 00,000  

Fixed Cost = 7, 00,000

Debts = 55, 00,000 (9%)  

Equity Capital = 65, 00,000

Therefore, Contribution = sales-variable cost = 85, 00,000-52, 00,000=33, 00,000

EBIT (Earnings before Interest and Tax) = Contribution-fixed cost

EBIT=33, 00,000-7, 00,000=26, 00,000

$\text { operating Leverage }=\frac{\text {Contribution}}{\text {EBIT}}=\frac{33,00,000}{26,00,000}=1.27$

$\text {Financial Leverage}=\frac{\text {Debt}}{\text {Equity}}=\frac{55,00,000 \times \frac{9}{100}}{65,00,000}=\frac{495000}{6500000}=0.076$

$\text { Combined Leverage }=\text { operating Leverage } \times \text { Financial Leverage }=1.27 \times 0.076=0.097$

New EBIT after sales drop,

EBIT= 60, 00,000-52, 00,000-7, 00,000=1, 00,000

New EBIT after sales drop is 1, 00,000