From the following financial data of Company X and Company Y: Company X Company Y Variable Cost 72,000 65% of Sales Fixed Cost 35,000 - Interest…

(i) Income Statement Particulars Co. X (₹) Co. Y (₹) Sales 1,23,000 (WN 2) 1,45,000 (-) Variable Cost (72,000) (94,250) (65% on sales) Contribution 51,000 (WN 2) 50,750 (-) Fixed Cost (35,000) (40,600) EBIT 16,000 (WN 1) 10,150 (WN 3) (-) Interest (12,000) (6,000) EBT 4,000 4,150 (-) Tax @ 30% (1,200) (1,245) EAT 2,800 2,905 WN 1: Calculation of EBIT for Co. X using Financial Leverage FL = EBIT / EBT or EBIT / (EBIT - Interest) 4 = EBIT / (EBIT - 12,000) EBIT = 16,000 EBT = 16,000 - 12,000 = 4,000 WN 2: Calculation of Contribution and Sales using reverse mechanism Contribution = EBIT + Fixed Cost = 16,000 + 35,000 Contribution = 51,000 Sales = Contribution + Variable Cost Sales = 1,23,000 WN 3: Calculation of EBIT for Co. Y using Operating leverage OL = Contribution / EBIT 5 = 50,750 / EBIT EBIT = 10,150 (ii) Margin of Safety (MOS) is inversely proportionate to the Operating Leverage as higher the safety margin lower would be the business risk MOS = 1 / OL Operating Leverage (Co. X) = 51,000 / 16,000 Operating Leverage (Co. X) = 3.1875: 1 Therefore, MOS for Co. X = 1 / 3.1875 MOS for Co. X = 31.37% Operating Leverage (Co. Y) = 5:1 Therefore, MOS for Co. Y = 1 / 5 MOS for Co. Y = 20% (iii) Combined leverage measures the percentage change in EPS due to percentage change in sales Combined Leverage = Contribution / EBT Combined Leverage (Co. X) = 51,000 / 4,000 = 12.75 Combined Leverage = % change in EPS / % change in sales 12.75 = % change in EPS / 25% % change in EPS (Co. X) = 318.75% Combined Leverage (Co. Y) = 50,750 / 4,150 = 12.23 12.23 = % change in EPS / 25% % change in EPS (Co. Y) = 305.75%