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Company has sales of 25,00,000. Variable cost of 12,50,000 and fixed cost of 50,000 and debt of l2,50,000 at 8% rate of interest. Calculate combined leverag?
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Company has sales of 25,00,000. Variable cost of 12,50,000 and fixed c...
Calculation of Combined Leverage
• Combined leverage is the measure of the extent to which a company's total expenses are accounted for by fixed costs.
• It is calculated by dividing the percentage change in earnings before interest and taxes (EBIT) by the percentage change in sales revenue.
• The formula for combined leverage is:
Combined Leverage = Operating Leverage x Financial Leverage
• Operating leverage measures the impact of fixed costs on a company's operating income, while financial leverage measures the impact of debt financing on a company's net income.
• To calculate operating leverage, we need to use the contribution margin ratio, which is the difference between sales revenue and variable costs divided by sales revenue.
Contribution Margin Ratio = (Sales Revenue - Variable Costs) / Sales Revenue
Contribution Margin Ratio = (25,00,000 - 12,50,000) / 25,00,000
Contribution Margin Ratio = 0.5 or 50%
• Operating Leverage = Contribution Margin Ratio / Operating Income
Operating Leverage = 50% / (25,00,000 - 12,50,000 - 50,000)
Operating Leverage = 2
• To calculate financial leverage, we need to use the interest coverage ratio, which is the ratio of earnings before interest and taxes (EBIT) to interest expense.
Interest Coverage Ratio = EBIT / Interest Expense
Interest Expense = 12,50,000 x 8% = 1,00,000
EBIT = 25,00,000 - 12,50,000 - 50,000 = 12,00,000
Interest Coverage Ratio = 12,00,000 / 1,00,000
Interest Coverage Ratio = 12
• Financial Leverage = 1 + (Total Debt / Equity)
Total Debt = 12,50,000
Equity = 25,00,000 - 12,50,000 - 50,000 = 12,00,000
Financial Leverage = 1 + (12,50,000 / 12,00,000)
Financial Leverage = 2.04
• Combined Leverage = Operating Leverage x Financial Leverage
Combined Leverage = 2 x 2.04
Combined Leverage = 4.08
Explanation of Combined Leverage
• Combined leverage is a measure of the extent to which a company's total expenses are accounted for by fixed costs.
• A company with high combined leverage has a high proportion of fixed costs, which can lead to higher profits in a favorable business environment, but can also lead to larger losses in an unfavorable environment.
• Operating leverage measures the impact of fixed costs on a company's operating income, while financial leverage measures the impact of debt financing on a company's net income.
• A company with high operating leverage has a high proportion of fixed costs in relation to its variable costs, while a company with high financial leverage has a high proportion of debt in relation to its equity.
• Combined leverage is calculated by multiplying the operating leverage and financial leverage of a company.
• A company with a combined leverage of 1 has an equal proportion of fixed costs and variable costs, while a company with a combined leverage greater than 1 has a higher proportion of fixed costs.
• Companies with high combined leverage should be cautious when taking on additional fixed costs or debt, as this can increase the risk of losses in
• Combined leverage is the measure of the extent to which a company's total expenses are accounted for by fixed costs.
• It is calculated by dividing the percentage change in earnings before interest and taxes (EBIT) by the percentage change in sales revenue.
• The formula for combined leverage is:
Combined Leverage = Operating Leverage x Financial Leverage
• Operating leverage measures the impact of fixed costs on a company's operating income, while financial leverage measures the impact of debt financing on a company's net income.
• To calculate operating leverage, we need to use the contribution margin ratio, which is the difference between sales revenue and variable costs divided by sales revenue.
Contribution Margin Ratio = (Sales Revenue - Variable Costs) / Sales Revenue
Contribution Margin Ratio = (25,00,000 - 12,50,000) / 25,00,000
Contribution Margin Ratio = 0.5 or 50%
• Operating Leverage = Contribution Margin Ratio / Operating Income
Operating Leverage = 50% / (25,00,000 - 12,50,000 - 50,000)
Operating Leverage = 2
• To calculate financial leverage, we need to use the interest coverage ratio, which is the ratio of earnings before interest and taxes (EBIT) to interest expense.
Interest Coverage Ratio = EBIT / Interest Expense
Interest Expense = 12,50,000 x 8% = 1,00,000
EBIT = 25,00,000 - 12,50,000 - 50,000 = 12,00,000
Interest Coverage Ratio = 12,00,000 / 1,00,000
Interest Coverage Ratio = 12
• Financial Leverage = 1 + (Total Debt / Equity)
Total Debt = 12,50,000
Equity = 25,00,000 - 12,50,000 - 50,000 = 12,00,000
Financial Leverage = 1 + (12,50,000 / 12,00,000)
Financial Leverage = 2.04
• Combined Leverage = Operating Leverage x Financial Leverage
Combined Leverage = 2 x 2.04
Combined Leverage = 4.08
Explanation of Combined Leverage
• Combined leverage is a measure of the extent to which a company's total expenses are accounted for by fixed costs.
• A company with high combined leverage has a high proportion of fixed costs, which can lead to higher profits in a favorable business environment, but can also lead to larger losses in an unfavorable environment.
• Operating leverage measures the impact of fixed costs on a company's operating income, while financial leverage measures the impact of debt financing on a company's net income.
• A company with high operating leverage has a high proportion of fixed costs in relation to its variable costs, while a company with high financial leverage has a high proportion of debt in relation to its equity.
• Combined leverage is calculated by multiplying the operating leverage and financial leverage of a company.
• A company with a combined leverage of 1 has an equal proportion of fixed costs and variable costs, while a company with a combined leverage greater than 1 has a higher proportion of fixed costs.
• Companies with high combined leverage should be cautious when taking on additional fixed costs or debt, as this can increase the risk of losses in
Community Answer
Company has sales of 25,00,000. Variable cost of 12,50,000 and fixed c...
Sales 25,00,000
less :variable cost 12,50,000
CONTRIBUTION. 12,50,000
less: fixed cost. 50,000
EBIT 12,00,000
(EBIT -earings before interest and tax)
less :interest 1,00,000
(8%of 12,50,000)
EBT(earings before tax) 11,00,000
combined leverage =operating leverage× financial leverage
OL = contribution/EBIT
=12,50,000/12,00,000
= 1.042 times
FL=EBIT/EBT
=12,00,000/11,00,000
=1.09 times
CL =OL×FL
=1.042×1.09
=1.13578 or 1.14 times
less :variable cost 12,50,000
CONTRIBUTION. 12,50,000
less: fixed cost. 50,000
EBIT 12,00,000
(EBIT -earings before interest and tax)
less :interest 1,00,000
(8%of 12,50,000)
EBT(earings before tax) 11,00,000
combined leverage =operating leverage× financial leverage
OL = contribution/EBIT
=12,50,000/12,00,000
= 1.042 times
FL=EBIT/EBT
=12,00,000/11,00,000
=1.09 times
CL =OL×FL
=1.042×1.09
=1.13578 or 1.14 times
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Company has sales of 25,00,000. Variable cost of 12,50,000 and fixed cost of 50,000 and debt of l2,50,000 at 8% rate of interest. Calculate combined leverag?
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Company has sales of 25,00,000. Variable cost of 12,50,000 and fixed cost of 50,000 and debt of l2,50,000 at 8% rate of interest. Calculate combined leverag? 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 Company has sales of 25,00,000. Variable cost of 12,50,000 and fixed cost of 50,000 and debt of l2,50,000 at 8% rate of interest. Calculate combined leverag? covers all topics & solutions for B Com 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Company has sales of 25,00,000. Variable cost of 12,50,000 and fixed cost of 50,000 and debt of l2,50,000 at 8% rate of interest. Calculate combined leverag?.
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