PROMOTIONAL ACTIVITIES

ADOPTED BY AUTOMOBILE
DEALER WITH RESPECT TO
OPERATING LEVERAGE

BY-
DHANANJAY GATTANI(MBA 52)
20 April 2010
 WHAT IS…

…SALES PROMOTION ?
-It is marketing techniques designed with in strategic marketing framework
to add value to a product or services in order to achieve specific sales.

… LEVERAGE?
-It is the effect of increase or decrease of fixed cost capital on shareholders.

In other words leverage is the ability of the firm to use fixed cost assets or
source of funds to magnify the returns to its owner.

1.Operational Leverage

2.Financial Leverage

3.Combined Leverage
… OPERATING LEVERAGE?

It is defined as the firm’s ability to use operating leverage results the present
of fixed operating expenses with the firm’s income stream.

-It measures the effect of change in sales quantity on earning before taxes.

Formula:
Contribution
Operating Leverage = ----------------------------------
EBIT
 PROMOTIONAL
ACTIVITIES

COMPANY DEALER

ADVERTISEMENT
ROAD SHOW
Radio ,T.V, INTERNET

SPECIAL GRAFICS TEST DRIVE

FREE SERVICING
DISCOUNT
CAMP

AUTOGRAPH BY
SCRATCH COUPON.
CELEBRITY.
 DATA
Variable Cost
Oct.2009 Nov.2009 Dec.2009
Purchasing Cost of Bike 32*80000 40*80000 38*80000
Electric,Phone,Stationery 10000 11500 10000
Maintenance 9600 12000 11400
Total Variable Cost 2579600 3223500 3061400

Fixed Cost
Oct.2009 Nov.2009 Dec.2009
Rent 50000 50000 50000
Salary 50000 50000 50000
Total Fixed Cost 100000 100000 100000
 INCOME STATEMENT OF DEALER
Selling Price Rs 87000 per bike

Oct.2009 Nov.2009 Dec.2009

Sales qty. 32 Unit 40 Unit 38 Unit
Sales Revenue 2784000 3480000 3306000

(-)Variable Cost 2586000 3231500 3069000

Contribution 198000 248500 237000
(-)Fixed Cost 100000 100000 100000
EBIT 98000 148000 137000
Operat.Leverage 2.02 1.67 1.72
 CONCLUSION

• Operating Leverage magnifies effect of changes in sales which

may be favorable or unfavorable.

• Higher level of risk is attached with high degree of leverage.

• Larger the fixed operational cost result into the high risk and
higher the firm’s operational leverage.

• Operational leverage is good or bad is based on the increase or

decrease in sales revenue.