The following detail of firm are :- sales=8500000, variable cost=5200000, fixed cost=700000, debt= 5500000, interest on debt = 9%, equity capital= 6500000. calculate its operating, financial and combined leverage. what will be its new ebit if sales drop to 6000000.
Answers
The operating, financial and combined leverage is 1.27 ; 0.076 ; and 0.097 respectively
Its new ebit if sales drop to 6000000 is 1,00,000
Explanation:
a. The calculation of the operating leverage is presented below:
= (Contribution margin) ÷ (EBIT)
where,
Contribution margin = Sales - Variable costs
= 85,00,000 - 52,00,000
= 33,000,000
And, the EBIT is
Contribution margin = Sales - Variable costs - fixed cost
= 85,00,000 - 52,00,000 - 7,00,000
= 26,000,000
So, the operating leverage is
= 33,000,000 ÷ 26,00,000
= 1.27
b. The determination of the financial leverage is given below:
= (Debt) ÷ (Equity)
where,
Debt is
= Debt × interest rate
= 55,00,000 ×9%
= 4,95,000
And, the equity is 65,00,000
So, the financial leverage is
= 4,95,000 ÷ 65,00,000
= 0.076
c. And, the combined leverage equal to
= Operating leverage × Financial leverage
= 1.27 × 0.076
= 0.097
And, the new EBIT is
As we know that
= Sales - Variable costs - Fixed costs
= 60,000,000 - 52,00,000 - 7,00,000
So, the new EBIT is
= 1,00,000
We simply use the above formulas so the calculation part can be done in easily manner.
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