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Kumar company has sales of Rs. 25,00,000. Variable cost of Rs. 12,50,000 and fixed cost of Rs. 50,000 and debt of Rs. 12,50,000 at 8% rate of interest. Calculate combined leverage. *?
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Kumar company has sales of Rs. 25,00,000. Variable cost of Rs. 12,50,0...
Calculation of Combined Leverage
Combined leverage is the measure of the sensitivity of operating profit to changes in sales volume. It is calculated by multiplying the degree of operating leverage with the degree of financial leverage.
1. Degree of Operating Leverage (DOL)
The degree of operating leverage (DOL) is the measure of the change in operating profit due to a change in sales volume. It is calculated by dividing the percentage change in operating profit by the percentage change in sales volume.
DOL = % Change in Operating Profit / % Change in Sales Volume
In this case, we have:
Sales = Rs. 25,00,000
Variable Cost = Rs. 12,50,000
Fixed Cost = Rs. 50,000
Operating Profit = Sales - Variable Cost - Fixed Cost
Operating Profit = Rs. 25,00,000 - Rs. 12,50,000 - Rs. 50,000
Operating Profit = Rs. 12,00,000
Let's assume that sales increase by 10%. Then, the new sales would be:
New Sales = Rs. 25,00,000 + (10% of 25,00,000)
New Sales = Rs. 27,50,000
The new operating profit would be:
New Operating Profit = New Sales - Variable Cost - Fixed Cost
New Operating Profit = Rs. 27,50,000 - Rs. 12,50,000 - Rs. 50,000
New Operating Profit = Rs. 15,50,000
Therefore, the percentage change in operating profit would be:
% Change in Operating Profit = (New Operating Profit - Operating Profit) / Operating Profit x 100%
% Change in Operating Profit = (15,50,000 - 12,00,000) / 12,00,000 x 100%
% Change in Operating Profit = 29.17%
The percentage change in sales volume would be:
% Change in Sales Volume = (New Sales - Sales) / Sales x 100%
% Change in Sales Volume = (27,50,000 - 25,00,000) / 25,00,000 x 100%
% Change in Sales Volume = 10%
Therefore, the degree of operating leverage (DOL) would be:
DOL = % Change in Operating Profit / % Change in Sales Volume
DOL = 29.17% / 10%
DOL = 2.917
2. Degree of Financial Leverage (DFL)
The degree of financial leverage (DFL) is the measure of the change in earnings per share due to a change in operating profit. It is calculated by dividing the percentage change in earnings per share by the percentage change in operating profit.
DFL = % Change in Earnings Per Share / % Change in Operating Profit
In this case, we have:
Debt = Rs. 12,50,000
Interest Rate = 8%
Interest Expense = Debt x Interest Rate
Interest Expense = Rs. 12,50,000 x 8%
Interest Expense = Rs. 1,00,000
Earnings Before Interest and Taxes (EBIT) = Operating Profit
EBIT = Rs. 12,00,000
Net Income = Earnings Before Interest and Taxes - Interest Expense
Net Income = Rs. 12,00,000 - Rs. 1,00
Combined leverage is the measure of the sensitivity of operating profit to changes in sales volume. It is calculated by multiplying the degree of operating leverage with the degree of financial leverage.
1. Degree of Operating Leverage (DOL)
The degree of operating leverage (DOL) is the measure of the change in operating profit due to a change in sales volume. It is calculated by dividing the percentage change in operating profit by the percentage change in sales volume.
DOL = % Change in Operating Profit / % Change in Sales Volume
In this case, we have:
Sales = Rs. 25,00,000
Variable Cost = Rs. 12,50,000
Fixed Cost = Rs. 50,000
Operating Profit = Sales - Variable Cost - Fixed Cost
Operating Profit = Rs. 25,00,000 - Rs. 12,50,000 - Rs. 50,000
Operating Profit = Rs. 12,00,000
Let's assume that sales increase by 10%. Then, the new sales would be:
New Sales = Rs. 25,00,000 + (10% of 25,00,000)
New Sales = Rs. 27,50,000
The new operating profit would be:
New Operating Profit = New Sales - Variable Cost - Fixed Cost
New Operating Profit = Rs. 27,50,000 - Rs. 12,50,000 - Rs. 50,000
New Operating Profit = Rs. 15,50,000
Therefore, the percentage change in operating profit would be:
% Change in Operating Profit = (New Operating Profit - Operating Profit) / Operating Profit x 100%
% Change in Operating Profit = (15,50,000 - 12,00,000) / 12,00,000 x 100%
% Change in Operating Profit = 29.17%
The percentage change in sales volume would be:
% Change in Sales Volume = (New Sales - Sales) / Sales x 100%
% Change in Sales Volume = (27,50,000 - 25,00,000) / 25,00,000 x 100%
% Change in Sales Volume = 10%
Therefore, the degree of operating leverage (DOL) would be:
DOL = % Change in Operating Profit / % Change in Sales Volume
DOL = 29.17% / 10%
DOL = 2.917
2. Degree of Financial Leverage (DFL)
The degree of financial leverage (DFL) is the measure of the change in earnings per share due to a change in operating profit. It is calculated by dividing the percentage change in earnings per share by the percentage change in operating profit.
DFL = % Change in Earnings Per Share / % Change in Operating Profit
In this case, we have:
Debt = Rs. 12,50,000
Interest Rate = 8%
Interest Expense = Debt x Interest Rate
Interest Expense = Rs. 12,50,000 x 8%
Interest Expense = Rs. 1,00,000
Earnings Before Interest and Taxes (EBIT) = Operating Profit
EBIT = Rs. 12,00,000
Net Income = Earnings Before Interest and Taxes - Interest Expense
Net Income = Rs. 12,00,000 - Rs. 1,00
Community Answer
Kumar company has sales of Rs. 25,00,000. Variable cost of Rs. 12,50,0...
Sales 25,00,000
Less:. variable cost. 12,50,000
contribution. 12,50,000
Less:. fixed cost. 50,000
EBIT. 12,00,000
Less:. interest. 1,00,000
EBT. 11,00,000
1.oprating leverage 1.04 times
2.financial leverage 12 times
3.combined leverage. 12.48 times
Less:. variable cost. 12,50,000
contribution. 12,50,000
Less:. fixed cost. 50,000
EBIT. 12,00,000
Less:. interest. 1,00,000
EBT. 11,00,000
1.oprating leverage 1.04 times
2.financial leverage 12 times
3.combined leverage. 12.48 times
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Kumar company has sales of Rs. 25,00,000. Variable cost of Rs. 12,50,000 and fixed cost of Rs. 50,000 and debt of Rs. 12,50,000 at 8% rate of interest. Calculate combined leverage. *?
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Kumar company has sales of Rs. 25,00,000. Variable cost of Rs. 12,50,000 and fixed cost of Rs. 50,000 and debt of Rs. 12,50,000 at 8% rate of interest. Calculate combined leverage. *? for B Com 2024 is part of B Com preparation. The Question and answers have been prepared according to the B Com exam syllabus. Information about Kumar company has sales of Rs. 25,00,000. Variable cost of Rs. 12,50,000 and fixed cost of Rs. 50,000 and debt of Rs. 12,50,000 at 8% rate of interest. Calculate combined leverage. *? covers all topics & solutions for B Com 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Kumar company has sales of Rs. 25,00,000. Variable cost of Rs. 12,50,000 and fixed cost of Rs. 50,000 and debt of Rs. 12,50,000 at 8% rate of interest. Calculate combined leverage. *?.
Kumar company has sales of Rs. 25,00,000. Variable cost of Rs. 12,50,000 and fixed cost of Rs. 50,000 and debt of Rs. 12,50,000 at 8% rate of interest. Calculate combined leverage. *? for B Com 2024 is part of B Com preparation. The Question and answers have been prepared according to the B Com exam syllabus. Information about Kumar company has sales of Rs. 25,00,000. Variable cost of Rs. 12,50,000 and fixed cost of Rs. 50,000 and debt of Rs. 12,50,000 at 8% rate of interest. Calculate combined leverage. *? covers all topics & solutions for B Com 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Kumar company has sales of Rs. 25,00,000. Variable cost of Rs. 12,50,000 and fixed cost of Rs. 50,000 and debt of Rs. 12,50,000 at 8% rate of interest. Calculate combined leverage. *?.
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