Question

Calculate the degree of Operating Leverage with the following information
Sales 50,000 Rs
Interest 5000 Rs
Variable Cost=
SESSOR
Fixed Cost 15,000 Rs​

Answer 1

Answer:Operating leverage is the measurement of degree to which a firm incurs a combination of fixed cost and variable cost. Operating leverage relates to the result of combination of fixed cost and variable cost. A company with greater  proportion of fixed cost is said to be using more operating leverage.

Operating leverage can be calculated as:

DOL=Sales- Variable cost/Profit

=Contribution/EBIT

For example: Fixed Cost is Rs.780000, variable cost is Rs.8 per unit, Sales price is Rs.25 per unit, no of units sold 300000 units.

Particulars Units Rate P/Unit Total

Sales 300000 25 7500000

Variable Cost 300000 8 2400000

Contribution     5100000

Fixed Cost     780000

EBIT/Profit     4320000

Financial Leverage=5100000/4320000

=1.18

It signifies that for every increase of 1% in sales, there will be an increase in EBIT by 1.18%.

Step-by-step explanation: