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A firm has total sales of rupees 25 lakh variable cost are rupees 70 lakh and its cost Rs 4 lakh firm has taken alone of rupees 10 lakh at 15% interest rate on the basis of above information calculate operating leverage and financial leverage or combined leverage is the firm words to double it earning before interest and Taxes how much of a rice sales would be needed on a percentage basis?
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A firm has total sales of rupees 25 lakh variable cost are rupees 70 l...
Operating Leverage:
Operating leverage is a measure of how sensitive a firm's operating income is to changes in sales revenue. It indicates the extent to which fixed costs are used in a firm's operations. It can be calculated using the following formula:
Operating Leverage = Contribution Margin / Operating Income
Where,
Contribution Margin = Sales - Variable Costs
Operating Income = Sales - Variable Costs - Fixed Costs
Given that the firm has total sales of rupees 25 lakh, variable costs of rupees 70 lakh, and fixed costs of rupees 4 lakh, we can calculate the operating leverage as follows:
Contribution Margin = 25 lakh - 70 lakh = -45 lakh (negative contribution margin indicates a loss)
Operating Income = 25 lakh - 70 lakh - 4 lakh = -49 lakh (negative operating income indicates a loss)
Operating Leverage = (-45 lakh) / (-49 lakh) = 0.9184
Financial Leverage:
Financial leverage is a measure of the degree to which a firm uses debt to finance its operations. It indicates the sensitivity of a firm's earnings per share (EPS) to changes in its operating income. It can be calculated using the following formula:
Financial Leverage = Operating Income / Earnings Before Interest and Taxes (EBIT)
Given that the firm has taken a loan of rupees 10 lakh at a 15% interest rate, the interest expense can be calculated as follows:
Interest Expense = Loan Amount x Interest Rate = 10 lakh x 15% = 1.5 lakh
EBIT = Operating Income + Interest Expense = -49 lakh + 1.5 lakh = -47.5 lakh
Financial Leverage = (-49 lakh) / (-47.5 lakh) = 1.0316
Combined Leverage:
Combined leverage is the product of operating leverage and financial leverage. It indicates the extent to which changes in sales revenue affect a firm's earnings per share. It can be calculated using the following formula:
Combined Leverage = Operating Leverage x Financial Leverage
Combined Leverage = 0.9184 x 1.0316 = 0.947
To double the firm's earnings before interest and taxes (EBIT), we need to find the percentage increase in sales required. Let's assume the current EBIT is X.
X + X = 2X (doubling the EBIT)
EBIT = Sales - Variable Costs - Fixed Costs - Interest Expense
2X = Sales - 70 lakh - 4 lakh - 1.5 lakh
2X = Sales - 75.5 lakh
Sales = 2X + 75.5 lakh
To find the percentage increase in sales, we need to calculate the percentage increase in EBIT and multiply it by the current sales.
Percentage Increase in EBIT = (2X - X) / X = X / X = 1
Percentage Increase in Sales = Percentage Increase in EBIT x Current Sales
Percentage Increase in Sales = 1 x 25 lakh = 25 lakh
Therefore, the firm would need to increase its sales by 25 lakh on a percentage basis to double its earnings before interest and taxes.
Operating leverage is a measure of how sensitive a firm's operating income is to changes in sales revenue. It indicates the extent to which fixed costs are used in a firm's operations. It can be calculated using the following formula:
Operating Leverage = Contribution Margin / Operating Income
Where,
Contribution Margin = Sales - Variable Costs
Operating Income = Sales - Variable Costs - Fixed Costs
Given that the firm has total sales of rupees 25 lakh, variable costs of rupees 70 lakh, and fixed costs of rupees 4 lakh, we can calculate the operating leverage as follows:
Contribution Margin = 25 lakh - 70 lakh = -45 lakh (negative contribution margin indicates a loss)
Operating Income = 25 lakh - 70 lakh - 4 lakh = -49 lakh (negative operating income indicates a loss)
Operating Leverage = (-45 lakh) / (-49 lakh) = 0.9184
Financial Leverage:
Financial leverage is a measure of the degree to which a firm uses debt to finance its operations. It indicates the sensitivity of a firm's earnings per share (EPS) to changes in its operating income. It can be calculated using the following formula:
Financial Leverage = Operating Income / Earnings Before Interest and Taxes (EBIT)
Given that the firm has taken a loan of rupees 10 lakh at a 15% interest rate, the interest expense can be calculated as follows:
Interest Expense = Loan Amount x Interest Rate = 10 lakh x 15% = 1.5 lakh
EBIT = Operating Income + Interest Expense = -49 lakh + 1.5 lakh = -47.5 lakh
Financial Leverage = (-49 lakh) / (-47.5 lakh) = 1.0316
Combined Leverage:
Combined leverage is the product of operating leverage and financial leverage. It indicates the extent to which changes in sales revenue affect a firm's earnings per share. It can be calculated using the following formula:
Combined Leverage = Operating Leverage x Financial Leverage
Combined Leverage = 0.9184 x 1.0316 = 0.947
To double the firm's earnings before interest and taxes (EBIT), we need to find the percentage increase in sales required. Let's assume the current EBIT is X.
X + X = 2X (doubling the EBIT)
EBIT = Sales - Variable Costs - Fixed Costs - Interest Expense
2X = Sales - 70 lakh - 4 lakh - 1.5 lakh
2X = Sales - 75.5 lakh
Sales = 2X + 75.5 lakh
To find the percentage increase in sales, we need to calculate the percentage increase in EBIT and multiply it by the current sales.
Percentage Increase in EBIT = (2X - X) / X = X / X = 1
Percentage Increase in Sales = Percentage Increase in EBIT x Current Sales
Percentage Increase in Sales = 1 x 25 lakh = 25 lakh
Therefore, the firm would need to increase its sales by 25 lakh on a percentage basis to double its earnings before interest and taxes.
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A firm has total sales of rupees 25 lakh variable cost are rupees 70 lakh and its cost Rs 4 lakh firm has taken alone of rupees 10 lakh at 15% interest rate on the basis of above information calculate operating leverage and financial leverage or combined leverage is the firm words to double it earning before interest and Taxes how much of a rice sales would be needed on a percentage basis?
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A firm has total sales of rupees 25 lakh variable cost are rupees 70 lakh and its cost Rs 4 lakh firm has taken alone of rupees 10 lakh at 15% interest rate on the basis of above information calculate operating leverage and financial leverage or combined leverage is the firm words to double it earning before interest and Taxes how much of a rice sales would 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 total sales of rupees 25 lakh variable cost are rupees 70 lakh and its cost Rs 4 lakh firm has taken alone of rupees 10 lakh at 15% interest rate on the basis of above information calculate operating leverage and financial leverage or combined leverage is the firm words to double it earning before interest and Taxes how much of a rice sales would 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 total sales of rupees 25 lakh variable cost are rupees 70 lakh and its cost Rs 4 lakh firm has taken alone of rupees 10 lakh at 15% interest rate on the basis of above information calculate operating leverage and financial leverage or combined leverage is the firm words to double it earning before interest and Taxes how much of a rice sales would be needed on a percentage basis?.
A firm has total sales of rupees 25 lakh variable cost are rupees 70 lakh and its cost Rs 4 lakh firm has taken alone of rupees 10 lakh at 15% interest rate on the basis of above information calculate operating leverage and financial leverage or combined leverage is the firm words to double it earning before interest and Taxes how much of a rice sales would 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 total sales of rupees 25 lakh variable cost are rupees 70 lakh and its cost Rs 4 lakh firm has taken alone of rupees 10 lakh at 15% interest rate on the basis of above information calculate operating leverage and financial leverage or combined leverage is the firm words to double it earning before interest and Taxes how much of a rice sales would 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 total sales of rupees 25 lakh variable cost are rupees 70 lakh and its cost Rs 4 lakh firm has taken alone of rupees 10 lakh at 15% interest rate on the basis of above information calculate operating leverage and financial leverage or combined leverage is the firm words to double it earning before interest and Taxes how much of a rice sales would be needed on a percentage basis?.
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