Commerce Exam > Commerce Questions > A firm has sales of rupees 10 lakh variable c...
Start Learning for Free
A firm has sales of rupees 10 lakh variable cost of rupees 7 lakh fixed cost of rupees 200000 and debentures of Rupees 500000 at 10% interest rate calculate the operating and financing and combined leverage if the form wants to double its earning before interest and tax how much rise in sales mode be needed on a percentage basis?
Most Upvoted Answer
A firm has sales of rupees 10 lakh variable cost of rupees 7 lakh fixe...
Operating Leverage:
Operating leverage refers to the extent to which a firm's operating income changes in response to a change in sales. It measures the sensitivity of operating income to changes in sales. The formula to calculate operating leverage is as follows:
Operating Leverage = Contribution Margin / Operating Income
Financing Leverage:
Financing leverage refers to the extent to which a firm's net income changes in response to a change in operating income. It measures the sensitivity of net income to changes in operating income. The formula to calculate financing leverage is as follows:
Financing Leverage = Operating Income / Net Income
Combined Leverage:
Combined leverage is the product of operating leverage and financing leverage. It measures the overall sensitivity of net income to changes in sales. The formula to calculate combined leverage is as follows:
Combined Leverage = Operating Leverage * Financing Leverage
Given Information:
- Sales: Rupees 10 lakh
- Variable Cost: Rupees 7 lakh
- Fixed Cost: Rupees 200000
- Debentures: Rupees 500000 at 10% interest rate
Calculating Operating Leverage:
Contribution Margin = Sales - Variable Cost = 10 lakh - 7 lakh = 3 lakh
Operating Income = Sales - Variable Cost - Fixed Cost = 10 lakh - 7 lakh - 2 lakh = 1 lakh
Operating Leverage = Contribution Margin / Operating Income = 3 lakh / 1 lakh = 3
Calculating Financing Leverage:
Interest Expense = Debentures * Interest Rate = 500000 * 10% = 50000
Net Income = Operating Income - Interest Expense = 1 lakh - 50000 = 50000
Financing Leverage = Operating Income / Net Income = 1 lakh / 50000 = 2
Calculating Combined Leverage:
Combined Leverage = Operating Leverage * Financing Leverage = 3 * 2 = 6
Doubling Earnings Before Interest and Tax (EBIT):
To double the EBIT, we need to find the increase in sales required. Let's assume the current EBIT is X.
EBIT = Sales - Variable Cost - Fixed Cost
X = 10 lakh - 7 lakh - 2 lakh
X = 1 lakh
To double the EBIT, we need to find the new sales amount (Y).
2X = Y - 7 lakh - 2 lakh
2 lakh = Y - 7 lakh - 2 lakh
2 lakh + 7 lakh + 2 lakh = Y
Y = 11 lakh
The firm needs to increase its sales to 11 lakh in order to double its EBIT.
Conclusion:
- The operating leverage of the firm is 3, indicating that a 1% increase in sales will result in a 3% increase in operating income.
- The financing leverage of the firm is 2, indicating that a 1% increase in operating income will result in a 2% increase in net income.
- The combined leverage of the firm is 6, indicating that a 1% increase in sales will result in a 6% increase in net income.
- To double its EBIT, the firm needs to increase its sales from 10 lakh to
Operating leverage refers to the extent to which a firm's operating income changes in response to a change in sales. It measures the sensitivity of operating income to changes in sales. The formula to calculate operating leverage is as follows:
Operating Leverage = Contribution Margin / Operating Income
Financing Leverage:
Financing leverage refers to the extent to which a firm's net income changes in response to a change in operating income. It measures the sensitivity of net income to changes in operating income. The formula to calculate financing leverage is as follows:
Financing Leverage = Operating Income / Net Income
Combined Leverage:
Combined leverage is the product of operating leverage and financing leverage. It measures the overall sensitivity of net income to changes in sales. The formula to calculate combined leverage is as follows:
Combined Leverage = Operating Leverage * Financing Leverage
Given Information:
- Sales: Rupees 10 lakh
- Variable Cost: Rupees 7 lakh
- Fixed Cost: Rupees 200000
- Debentures: Rupees 500000 at 10% interest rate
Calculating Operating Leverage:
Contribution Margin = Sales - Variable Cost = 10 lakh - 7 lakh = 3 lakh
Operating Income = Sales - Variable Cost - Fixed Cost = 10 lakh - 7 lakh - 2 lakh = 1 lakh
Operating Leverage = Contribution Margin / Operating Income = 3 lakh / 1 lakh = 3
Calculating Financing Leverage:
Interest Expense = Debentures * Interest Rate = 500000 * 10% = 50000
Net Income = Operating Income - Interest Expense = 1 lakh - 50000 = 50000
Financing Leverage = Operating Income / Net Income = 1 lakh / 50000 = 2
Calculating Combined Leverage:
Combined Leverage = Operating Leverage * Financing Leverage = 3 * 2 = 6
Doubling Earnings Before Interest and Tax (EBIT):
To double the EBIT, we need to find the increase in sales required. Let's assume the current EBIT is X.
EBIT = Sales - Variable Cost - Fixed Cost
X = 10 lakh - 7 lakh - 2 lakh
X = 1 lakh
To double the EBIT, we need to find the new sales amount (Y).
2X = Y - 7 lakh - 2 lakh
2 lakh = Y - 7 lakh - 2 lakh
2 lakh + 7 lakh + 2 lakh = Y
Y = 11 lakh
The firm needs to increase its sales to 11 lakh in order to double its EBIT.
Conclusion:
- The operating leverage of the firm is 3, indicating that a 1% increase in sales will result in a 3% increase in operating income.
- The financing leverage of the firm is 2, indicating that a 1% increase in operating income will result in a 2% increase in net income.
- The combined leverage of the firm is 6, indicating that a 1% increase in sales will result in a 6% increase in net income.
- To double its EBIT, the firm needs to increase its sales from 10 lakh to
Attention Commerce Students!
To make sure you are not studying endlessly, EduRev has designed Commerce study material, with Structured Courses, Videos, & Test Series. Plus get personalized analysis, doubt solving and improvement plans to achieve a great score in Commerce.
|
Explore Courses for Commerce exam
|
|
Similar Commerce Doubts
Top Courses for CommerceView all
A firm has sales of rupees 10 lakh variable cost of rupees 7 lakh fixed cost of rupees 200000 and debentures of Rupees 500000 at 10% interest rate calculate the operating and financing and combined leverage if the form wants to double its earning before interest and tax how much rise in sales mode be needed on a percentage basis?
Question Description
A firm has sales of rupees 10 lakh variable cost of rupees 7 lakh fixed cost of rupees 200000 and debentures of Rupees 500000 at 10% interest rate calculate the operating and financing and combined leverage if the form wants to double its earning before interest and tax how much rise in sales mode be needed on a percentage basis? for Commerce 2024 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about A firm has sales of rupees 10 lakh variable cost of rupees 7 lakh fixed cost of rupees 200000 and debentures of Rupees 500000 at 10% interest rate calculate the operating and financing and combined leverage if the form wants to double its earning before interest and tax how much rise in sales mode be needed on a percentage basis? covers all topics & solutions for Commerce 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for A firm has sales of rupees 10 lakh variable cost of rupees 7 lakh fixed cost of rupees 200000 and debentures of Rupees 500000 at 10% interest rate calculate the operating and financing and combined leverage if the form wants to double its earning before interest and tax how much rise in sales mode be needed on a percentage basis?.
A firm has sales of rupees 10 lakh variable cost of rupees 7 lakh fixed cost of rupees 200000 and debentures of Rupees 500000 at 10% interest rate calculate the operating and financing and combined leverage if the form wants to double its earning before interest and tax how much rise in sales mode be needed on a percentage basis? for Commerce 2024 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about A firm has sales of rupees 10 lakh variable cost of rupees 7 lakh fixed cost of rupees 200000 and debentures of Rupees 500000 at 10% interest rate calculate the operating and financing and combined leverage if the form wants to double its earning before interest and tax how much rise in sales mode be needed on a percentage basis? covers all topics & solutions for Commerce 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for A firm has sales of rupees 10 lakh variable cost of rupees 7 lakh fixed cost of rupees 200000 and debentures of Rupees 500000 at 10% interest rate calculate the operating and financing and combined leverage if the form wants to double its earning before interest and tax how much rise in sales mode be needed on a percentage basis?.
Solutions for A firm has sales of rupees 10 lakh variable cost of rupees 7 lakh fixed cost of rupees 200000 and debentures of Rupees 500000 at 10% interest rate calculate the operating and financing and combined leverage if the form wants to double its earning before interest and tax how much rise in sales mode be needed on a percentage basis? in English & in Hindi are available as part of our courses for Commerce.
Download more important topics, notes, lectures and mock test series for Commerce Exam by signing up for free.
Here you can find the meaning of A firm has sales of rupees 10 lakh variable cost of rupees 7 lakh fixed cost of rupees 200000 and debentures of Rupees 500000 at 10% interest rate calculate the operating and financing and combined leverage if the form wants to double its earning before interest and tax how much rise in sales mode be needed on a percentage basis? defined & explained in the simplest way possible. Besides giving the explanation of
A firm has sales of rupees 10 lakh variable cost of rupees 7 lakh fixed cost of rupees 200000 and debentures of Rupees 500000 at 10% interest rate calculate the operating and financing and combined leverage if the form wants to double its earning before interest and tax how much rise in sales mode be needed on a percentage basis?, a detailed solution for A firm has sales of rupees 10 lakh variable cost of rupees 7 lakh fixed cost of rupees 200000 and debentures of Rupees 500000 at 10% interest rate calculate the operating and financing and combined leverage if the form wants to double its earning before interest and tax how much rise in sales mode be needed on a percentage basis? has been provided alongside types of A firm has sales of rupees 10 lakh variable cost of rupees 7 lakh fixed cost of rupees 200000 and debentures of Rupees 500000 at 10% interest rate calculate the operating and financing and combined leverage if the form wants to double its earning before interest and tax how much rise in sales mode be needed on a percentage basis? theory, EduRev gives you an
ample number of questions to practice A firm has sales of rupees 10 lakh variable cost of rupees 7 lakh fixed cost of rupees 200000 and debentures of Rupees 500000 at 10% interest rate calculate the operating and financing and combined leverage if the form wants to double its earning before interest and tax how much rise in sales mode be needed on a percentage basis? tests, examples and also practice Commerce tests.
|
|
Explore Courses for Commerce exam
|
|
Suggested Free Tests
Signup for Free!
Signup to see your scores go up within 7 days! Learn & Practice with 1000+ FREE Notes, Videos & Tests.
|
© EduRev
|
Education Revolution
|
|
Signup to see your scores
go up within 7 days!
Access 1000+ FREE Docs, Videos and Tests
Takes less than 10 seconds to signup