FIN622 - Assignment No.

01
Semester: Fall 2020 Submission Date: 11-12-
Student ID: MC190405830 2020

SOLUTION:

Given Data:

Policy X Policy Y
Variables Recessio Recessio
Normal Boom Normal Boom
n n
240,00 360,00 240,00 360,00
Sales 190,000 190,000
0 0 0 0
168,00 252,00 204,00 306,00
Variable Cost 133,000 161,500
0 0 0 0
Fixed Cost 60,000 60,000 60,000 20,000 20,000 20,000

I.
Profit before Interest and Tax (PBIT) = Contribution Margin – Fixed Cost
= Sales – Variable Cost – Fixed Cost

Policy X Policy Y
Variables Recessio Recessio
Normal Boom Normal Boom
n n
240,00 360,00 240,00 360,00
Sales 190,000 190,000
0 0 0 0
168,00 252,00 204,00 306,00
Variable Cost 133,000 161,500
0 0 0 0
Fixed Cost 60,000 60,000 60,000 20,000 20,000 20,000
Profit before Interest and Tax -3,000 12,000 48,000 8,500 16,000 34,000

II.
Contribution Margin
Degree of Operating Leverage =
Contribution Margin−¿ Cost
Contribution Margin
=
PBIT

Policy X Policy Y
Variables
Recession Normal Boom Recession Normal Boom
240,00
Sales 190,000 360,000 190,000 240,000 360,000
0
 FIN622 - Assignment No. 01
Semester: Fall 2020 Submission Date: 11-12-
Student ID: MC190405830 2020

168,00
Variable Cost 133,000 252,000 161,500 204,000 306,000
0
Fixed Cost 60,000 60,000 60,000 20,000 20,000 20,000
Contribution Margin 57,000 72,000 108,000 28,500 36,000 54,000
PBIT -3,000 12,000 48,000 8,500 16,000 34,000
Degree of Operating Leverage -19 6 2.250 3.353 2.250 1.588

III.
Which policy has a relatively higher degree of operating leverage considering each economic
condition? (Provide the only name of the policy)

Economic
Policy, that has a relatively higher degree of operating leverage.
Condition

Recession Policy “Y” has a higher degree of operating leverage

Normal Policy “X” has a higher degree of operating leverage

Boom Policy “X” has a higher degree of operating leverage

IV.

Under which policy, the profitability of the company gets less affected due to changes in the
economic condition? Why is that so? (Provide only the name of policy and logic concisely).

Answer:
Policy “X” is less affected due to changes in the economic condition because the
Variable cost of Policy “X” is less.