CALCULATE the operating leverage, financial leverage and combined leverage from the following data under Situation I and II and Financial Plan A and…

CA Intermediate · Financial Management and Strategic Management · MTP · May 2025
CALCULATE the operating leverage, financial leverage and combined leverage from the following data under Situation I and II and Financial Plan A and B: Installed Capacity 4,000 units Actual Production and Sales 75% of the Capacity Selling Price 30 per unit Variable Cost 15 per unit Fixed Cost: Under Situation I 15,000 Under Situation-II 20,000 Capital Structure: Financial Plan A (₹) B (₹) Equity 10,000 15,000 Debt (Rate of Interest at 20%) 10,000 5,000 20,000 20,000

Suggested Answer and Working Notes:

(i) Operating leverages: Particulars Situation-I (₹) Situation-II (₹) Sales (3,000 units @30/- per unit) 90,000 90,000 Less: Variable Cost (VC) @15 per unit (45,000) (45,000) Contribution (C) 45,000 45,000 Less: Fixed Cost (FC) 15,000 20,000 EBIT 30,000 25,000 Operating Leverage = C EBIT 45,000 30,000 = 1.5 45,000 25,000 = 1.8 (ii) Financial Leverages: A (₹) B (₹) Situation I: EBIT 30,000 30,000 Less: Interest on debt (2,000) (1,000) EBT 28,000 29,000 Financial Leverage = EBIT EBT 30,000 28,000 = 1.07 30,000 29,000 = 1.03 Situation-II: EBIT 25,000 25,000 Less: Interest on debt (2,000) (1,000) EBT 23,000 24,000 Financial Leverage = EBIT EBT 25,000 23,000 = 1.09 25,000 24,000 = 1.04 (iii) Combined Leverages: A (₹) B (₹) (a) Situation I 1.5 x 1.07 = 1.61 1.5 x 1.03 = 1.55 (b) Situation II 1.8 x 1.09 = 1.96 1.8 x 1.04 = 1.87

Topics: Part-A: Financial Management

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