The following data relates to Beta Limited: Sales 2,00,000 Less: Variable Expenses (30%) 60,000 Contribution 1,40,000 Fixed operating expenses…

CA Intermediate · Financial Management and Strategic Management · MTP · January 2025
The following data relates to Beta Limited: Sales 2,00,000 Less: Variable Expenses (30%) 60,000 Contribution 1,40,000 Fixed operating expenses 1,00,000 EBIT 40,000 Less: Interest 5,000 EBT 35,000 (i) CALCULATE by what percentage will EBT increase if sales increases by 6 percent. (ii) CALCULATE by what percentage will EBIT increase if there is 10 per cent increase in sales? (iii) CALCULATE by what percentage EBT increase if EBIT increases by 6 per cent?

Suggested Answer and Working Notes:

(i) Increase in taxable income if sales increase by 6%. Combined Leverage = Contribution / EBT = 1,40,000 /35,000 = 4 If the sales increases by 6%, EBT will increase by 24%. (4 × 6%) (ii) Increase in EBIT if sales increase by 10%. Operating Leverage = Contribution / Earnings before interest and tax = 1,40,000 /40,000 = 3.5 If sales increases by 10%, EBIT will increase by (3.5× 10) 35%. (iii) Increase in taxable income if EBIT increase by 6%. Financial Leverage = Earnings before interest and tax(EBIT) / EBT = 40,000 /35,000 =1.14 If EBIT increases by 6%, EBT will increase by 6.8%. (1.14 × 6%)

Topics: Part-A: Financial Management

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