Finance manager of A Ltd. noticed that a 5% increase in sales leads to increase of 9,000 in operating profit. The company operates with a…

(i) Current level of Sales: Let the present sales be = X or 5% of Sales×40% = 9,000 or 0.05X x 0.40 = 9,000 or 0.02X = 9,000 Current Sales (X) = 4,50,000 P/V ratio = Change in profit/ Change in sales 0.40 = 9,000/X X = 9,000/0.40 = 22,500 Hence, total sales; = Change in sales/ % change in sales = 22,500/0.05 = 4,50,000 Income Statement Particulars (₹) Sales 4,50,000 Contribution (40%) 1,80,000 Less: Fixed annual operating cost (1,35,000) EBIT (Earnings before interest and tax) 45,000 Less: Interest (30,000) EBT (Earnings before tax) 15,000 (ii) Leverage Operating Leverage = Contribution EBIT = 1,80,000 45,000 = 4 Financial Leverage = EBIT EBT = 45,000 15,000 = 3 Combined Leverage = Operating Leverage × Financial Leverage = 4 x 3 = 12 Or, Combined Leverage = Contribution EBT = 1,80,000 15,000 = 12