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Operating Leverage - Working

Particulars Situation I Situation II


Sales @30/ unit * (75% * 4,000) 90,000 90,000
Variable Cost @15/ unit * (75% * 4000) 45,000 45,000
Gross Margin / Contribution 45,000 45,000
Fixed Costs 15,000 20,000
Earnings Before Interest and tax / Operating Profit 30,000 25,000

Operating Leverage? 1.50 1.80

Financial Leverage
Plan A Plan B
Debt 10,000 5,000
Interest on debt is 20% 2,000 1,000

Situation I Plan A Plan B


Earnings Before Interest and tax / Operating Profit 30,000 30,000
Interest 2,000 1,000
Earnings Before Tax 28,000 29,000

Financial Leverage? 1.07 1.03

Situation II Plan A Plan B


Earnings Before Interest and tax / Operating Profit 25,000 25,000
Interest 2,000 1,000
Earnings Before Tax 23,000 24,000

Financial Leverage? 1.09 1.04

Plan A Plan B
Combined Leverages Situation I 1.61 1.55
Combined Leverages Situation II 1.96 1.88
Particulars Rs. Rs.
Sales 7,500,000 5,000,000
Variable cost -4,200,000 -2,800,000 -56%
Gross Margin / Contribution 3,300,000 2,200,000
Fixed costs -600,000 -600,000
EBIDTA EBIT / Operating Profit 2,700,000 1,600,000 0.36 0.32
Interest -405,000
EBT 2,295,000

Operating Leverage 1.22 33% 41% 1,600,000


Financial Leverage 1.18
Combined Leverage 1.44

Sales drop->>>> 33% 0.33


Operating leverage 1.22

If my sales drop by 33.33% - what will my EBIT be?


NO FC EBIDTA 3,300,000 1,099,890 2,200,110
With FC EBIDTA 2,700,000 1,099,890 1,600,110 600,000

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