Following data of PC Ltd. under Situations 1, 2 and 3 and Financial Plan A and B is given: Installed Capacity (units) 3,600Actual Production and…

(i) Operating Leverage Situation 1 (₹) Situation 2 (₹) Situation 3 (₹) Sales (S) 2,400 units @30 per unit 72,000 72,000 72,000 Less: Variable Cost (VC) @20 per unit 48,000 48,000 48,000 Contribution (C) 24,000 24,000 24,000 Less: Fixed Cost (FC) 3,000 6,000 9,000 EBIT 21,000 18,000 15,000 Operating Leverage = C / EBIT 24,000 /21,000 = 1.14 24,000 /18,000 = 1.33 24,000 /15,000 = 1.60 Financial Leverage Financial Plan A (₹) B (₹) Situation 1 EBIT 21,000 21,000 Less: Interest on debt (₹ 15,000 x 12%); (₹ 7,500 x 12%) 1,800 900 EBT 19,200 20,100 Financial Leverage = EBIT / EBT 21,000 /19,200 = 1.09 21,000 /20,100 = 1.04 Situation 2 EBIT 18,000 18,000 Less: Interest on debt 1,800 900 EBT 16,200 17,100 Financial Leverage = EBIT / EBT 18,000 /16,200 = 1.11 18,000 /17,100 = 1.05 Situation 3 EBIT 15,000 15,000 Less: Interest on debt 1,800 900 EBT 13,200 14,100 Financial Leverage = EBIT / EBT 15,000 /13,200 = 1.14 15,000 /14,100 = 1.06 (ii) Combined Leverages CL = OL x FL Financial Plan A (₹) Financial Plan B (₹) (a) Situation 1 1.14 x 1.09 = 1.24 1.14 x 1.04 = 1.19 (b) Situation 2 1.33 x 1.11 = 1.48 1.33 x 1.05 = 1.40 (c) Situation 3 1.60 x 1.14 = 1.82 1.60 x 1.06 = 1.70 The above calculations suggest that the highest value is in Situation 3 financed by Financial Plan A and the lowest value is in the Situation 1 financed by Financial Plan B.