88 (D

ntribution
CL) =-Uribution
EBT
SOLVED PROBLEMS
llustration 1:
Find the operating leverage from the
Sales following data:
Variable Cost Rs.50,0000
Fixed Cost 60%
Rs. 12,000
Solution:
Income Statement
Sales
Less: Variable Cost Rs.
Contribution 50,000
Less: Fixed 30,000
Cost excluding Interest 20,000
Eamings Before Interest and Tax (EBIT) 12,000
Contribution 20,000 8,000
Operating Leverage EBIT 8,000 2.5
illustration 2:
Find the financial leverage from the following data:
Net Worth Rs. 25,00,000
94 Vipul's Corporate Finance(BM
MS
Debt/Equity 3:1
Interest Rate 12%
Operating Profit Rs. 20,00,000
Solution:
Debt-Equity Ratio NetDebt
Worth
Debt
25.00.000
Debt 3 x 25,00,000
Debt Rs.75,00,000
Interest 12% on Debt
12
75,00,000 x 100
Interest Rs. 9,00,000
Rs.
EBIT 20,00,000
Less: Interest 9.00.000
EBT 11.00.000
EBIT
Financial LeverageEBT 20,00,000
EBT11,00,000 1.81
Illustration 3:
An analytical statement of Q-Me Company is shown below. It is basedon an output sales eve
of60,000 units.
Sales
Rs.
9,60.0
Less: Variable Cost
5.60.0
Contribution
4,00.0
Less: Fixed Cost excluding Interest
2,40,0
Eamings Before Interest and Tax (EBIT)
1,60,00
Less: Interest
60.00
Earnings Before Tax 1,0,00
Less:Taxes 50%
50,0
Earnings After Tax 50.00
Calculate the degree of
Operating Leverage,
(ii) Financial Leverage, and
(ii) Combined Leverage.
from the above data.
Solution:
() Operating Leverage Contribution 4,00,000
EBIT 1,60,000 2.5

(i) Financial Leverage EBIT 1,60,000

EBT 1,00,000 1.6

Contribution 4,00.000
(H) Combined Leverage-IOution 4,00.000
EBT 1,00,000 4
OR
Combined Leverage Operating Leverage Financial Leverage
x

2.5x 1.6=4
 Leverages
V"Y Y 95
llustration 4:
allate degree of
Calculate degree
of operating leverage, degree of financial leverage and combined leverage
(a) date:
from the following
Sales 1,00,000 units at Rs. 2 per unit is Rs. 2,00,000.
unit at Re. 0.70.
Variable cost per
Rs. 1,00,000.
Fixed Costs:
Interest Charges;
Rs. 3,668.
Which combinations of operating and financial leverages constitute:
() situation and
( risky
(i) ideal ituation

Solution:
Income Statement (Rs.p.a.)
a Per Unit For 1,00,000 Units
Particulars
Rs Rs.
Sales 2.00 2,00,000
Less: Variable Cost 0.70 70.000
Contnibution 1.30 1,30,000
Interest
Less: Fixed Cost excluding Tax 1,00,000
Eanings Before Interest and (EBIT) 30,000
Less: Interest 668
Earnings Before Tax 26,332
Contribution 1.30,000 _
0 DOL EBIT 30,000=4.33

EBIT 30,000
26,332 1.13
(i) DFL
EBT
(ii) DCL
Contribution 1,30,000 4.93
EBT 26,332
situation.
(6) High operating leverage combined with high financial leverage will constitute a risky
In case of a normal situation one of the leverage should be high and another should be low.
Whereas in case of an ideal situation both the leverages are low.
Illustration5:
X corporation has estimated that for a new product its breakeven point is 2,000 units if the item
for Rs. 14 per unit, the company has currently identified variable cost of Rs. 9
per unit,
ISsold
calculate the degree of operating leverage for sales volume of 2,500 units and 3,000 units. What do
units and 3,000 units
you infer from the degree of operating leverage at the sales volume of 2,500
andtheir difference if any?
Solution:
IncomeStatement
Per Unit For2,000 Units For 2,500 Units For 3,000 Units
Particulars Rs. Rs. Rs.
Rs.
Sales 14 28,000 35,000 42,000
Less: Variable Cost 18,000 22,500 27,000
Contribution 5 10,000 12,500 15,000
Less: Fixed Cost excluding Interest 10,000 10,000 10,000
Earnings Before Interest and Tax (EBIU| Zero 2,500 5.000
12,500 15,000
DOL Contribution
EBIT 2,500 5,000
5
 Vipul's Corporate Finance
96 BM
i.e. by 20%, operating
Drns

units to 3,000 units

wItn increase in sales volume from 2,500
Thus with
increase in
s a e S Volume b
increased from Rs. 2,500 to Rs. 5.000 i.e. by 100%.
units operating profit has doubled.
Illustration 6: under
situations 1 and 2 and tn
Calculate operating and financial leverage operation and.
erage information relating to the
plans A
espectively
from the tollowing and financial leverage whih
of operating
structure of a company. What are the combinations
highest and the least value?
Installed capacity 2,000 units
Actual production and sales 50% of installed capacity
Selling price per unit Rs 20
Variable cost per unit Rs. 10
Fixed Cost: Under situation I Rs. 4,000
Under situation I Rs. 5,000

Capital Structure: Financial Plan

A(Rs.) BRS
5,000 15,000
Equity 15,000 5,000
Debt (Costof Debt=10%) 20,000 20,000
Solution:
Installed Capacity
Actual Production and Sales =
x
50
2,000 1,000 units
100x
100
=

Working Note:
Situation

Fixed Cost
Fixed Cost
Rs. 5,000
Rs. 4,000

Plan B Plan A Plan

Plan A Rs. 500
Rs. 1,500 Rs. 500 Rs. 1,500
Income Statement
Situation Situationl
Plan A Plan B Plan A
Plen
PlanB
B
Particulars
PU For 1,000 PU For1,000 PU For 1,000 PU For 1,0
Unis
Units Units Units
Rs. Rs. Rs. Rs. Rs. Rs. Rs. 20.00
20 20,000 20 20,000 20 20,000 20
Sales 10000

Less: Varable Cost 10 10,000 10 10,000 10 10.000 10 10,00

Contribution
10 10,000 10 10,000 10 10,000 10
Cost excluding Interest 4,000 4,000 5,000
Less: Fixed 5,00

6,000 6,000 5,000

EBIT
L e s s : Interest 1,500 500 1.500 4 5 0 0

Earnings BeforeTax 4,500 5,500 3,500

 Leverages

97
Contribution
DOL EBIT 10,000 10,000
6,000 10,000 10,000
= 1.66
G.O00 5,000 5,000
EBIT 1.66
I) DFL EBT 6,000 2 =2
4,500 6,000 5,000
5,500 3,500
5,000
Contribution 1.33 1.09
4,500
(ii) DCL EBT 10.000 1.42 =1.11
4,500 10,000 10,000
5,500 10,000
= 2.22 3,500 4,500
Illustration 7: 1.81 2.85 2.22
Calculate the operating leverage, financial
data under Situation l and lI and Financial Plan leverage
A and B.
and combined
leverage from the following
Installed capacity 4,000 units
Actual production and sales 75% of the
Selling price Rs. 30 per unit capacity
Variable Cost Rs. 15 per unit
Fixed Cost:
Under Situation 1 Rs. 15,000
Under Situation l Rs. 20,000
Capital Structure:
Financial Plan
A 3
Equity (Rs.) (Rs.)
Debt (Rate of Interest at 20%) 10,000 15,000
10,00% 5.000
Solution: 20,000 20.000
Actual Production and Sales 75
=0x Installed Capacity
75
100 * 4,000

3,000 units
Working Note:
Situation

Fixed Cost Fixed Cost

Rs. 15,000 Rs. 20,000

Plan A Plan B Plan A Plan B

Hs.2,000 Rs. 1,000 Rs. 2,000 Rs. 1,000
 Vipul Corporate Finance (B/vI°

IncomeStatement
Situation Sltuation I
Plan A PlanA Plan B
Plan B PU
Total
PU Total PU Total PU Total
Particulars for 3,000
for 3,000
for 3,000 for 3,000 Units
Units Units Units Rs.
RS.
Rs. Rs. Rs. Rs. Rs. Rs. 30 90,000
Sales 30 90,000 30 90,000 30 90,000
45,000
Less: Variable Cost 45,000
15 45,000 45,000 15 15 45,000
45,000
Contribution 15 45,000 15 45,000 15
20,000
20,000
Less: Fixed Cost excluding Interest 15,000 15,000 25,000
25,000
EBIT 30,000 30,000
2,000
1,000
| Less: Interest 2,000 1,000 24,000
23,000
29,000
Eamings Betfore Tax 28,000 45,000 45,000
) DOL Contribution 45,000 45,000 25,000 25,000
EBIT 30,000 30,000
1.8 1.8
1.5 1.5 25,000
30,000 25,000
30,000 23,000 24,000
(Gi) DFL 28,000 29,000
= 1.08 = 1.04
= 1.07 1.03
45,000 45,000 45,000
(ii) DCL= ontrbution 45,000 23,000 24,000
EBT 28,000 29,000
= 1.55 1 1.95 1.87
1.60
Illustration 8: and the degree of
leverage, degree of financial leverage
Calculate the degree of operating
firms andinterpret the results:
Combined leveragefor the following A
Firms 60,000 15,000 1,00,000
Output (Units) 7,200 14,000 1,500
Fixed Costs (Rs.) 0.20 .50 0.02
Variable Cost Per Unit (Rs.) 8,000 Nil
Interest on Borrowed Capital (Rs.)
4,000
0.60 5.00 0.10
Selling Price Per Unit (Rs.)
Solution:
IncomeStatement
Firms
A C
Total for PU Totalfor PU Total for
Particulars PU
60,000Units 15,000 Units 1,00,000Units
Rs. Rs. Rs.Rs. Rs. Rs. Rs.
Sales 0.60 36,000 5.00 75,000 0.10 10,000
12,000 1.50 22,500 0.02 2,000
Less: Variable Cost 0.20
0.08 8,000
Contribution 0.40 24,000 3.50 52,500
1,500
Less: Fixed Cost excluding Interest 7,200 14,000
6,500
EBIT 16,800 38,500
NiI
Less: Interest 4,000 8,000
6,500
Earnings Before Tax 12,800 30,500
8.000
DOL o n t r i b u t i o n
24,000 52,500 6,500
EBIT 16,800 38,500
1.23

1.42 1.36
6500
EBIT 16,800
(i) DFL EBT 38,500 6500

12,800 30,500
1.31 1.0
1.26
 Leverages VV"Y 99
Contribution 24,000 52,500 8,000
(i) DCL= EBT 12,800 30,500 6,500
1.87 = 1.72 1.30
Illustration 9:
Compute diftferent leverages from the following information:
Interest
Rs.
22.000
Sales (2,200 Units)
Variable Cost
2,20,000
1,10,000
Fixed Cost 66.000
Solution:
Income Statement
Rs.
Sales 2,20,000
Less: Variable Cost
1,10.000
Contribution 1,10,000
Less: Fixed Cost excluding Interest
66.000
Eamings Before Interest and Tax (EBIT) 44,000
Less: Interest 22.000
EamingsBefore Tax 22.000
) DOL Contribution 1,10,000
44,000 2.5
EBIT
i) DFL
EBIT 44,000
EBT 22,000 2
(i) DCL Contribution 1,10,000
22,000 5
EBT
llustration 10:
Scorpio Ltd. furnishes the following information:
Balance Sheet
Rs Assets Rs.
Liabilities 31.00,000
Equity Capital (Rs. 10 each) 10,00,000 Sundry Assets
10% Preference Share Capital 10,00,000
89% Debentures 11,00,000
31,00,000 31.00.000
the return on investment is 18% and the tax
rate is 40%.

Calculate:
a) Financial leverage.
(6) Earnings per share. and combined leverage of the frm
ratio is 0.6, calculate the operating
) fthe asset turnover
33%%. is
assuming that the firms PN Ratio
Solution:
EBIT 100
ROlCapitalEmployeo
EBIT
18 31,00,000 100

EBIT =18x 31,000

EBIT = Rs. 5,58,000
 Illustration 23:
Given information for a year are Sales Rs. 5,00,000. Variable costs Rs. 3,00,000. FXea
Operating Cost Rs. 1,00,000. Interest on borrowings Rs. 20,000. Calculate Operating leverage and
Financial Leverage.
Solution:
Income Statement
Amount
Particulars
(Rs.p.a.)
Sales 5,00,000
Less: Vanable Cost 3,00,000
Contribution 2,00,000
Less: Fixed Operating Cost 1,00,000
1,00,000
Earnings Before Interest and Taxes
Less: Interest on Borrowings 20,000
Eamings BeforeTax 80,000
DOL
Contribution
EBIT
2,00,000
1,00,0002

DFL EBIT 1,00,000

(i) DFL EBT 80,000 '= 1.25
=

Illustration 24: (Nov. 17)

Following are the details of two companies A and B.
Particulars A B
Variable cost per unit (Rs.) 38 45

| Fixed cost per ar1num (Rs.) 4,00,000 6,00,000

 Leverages

unit (Rs.)
Price per 85 120
Selling (units)
annum 18,000 20,000
OutputPer (Rs.)
Debentures
Intereston 1.25,000 80,000
Calculate:

(
Operating Leverage
Financial Leverage of two companies.
Solution:

INCOMESTATEMENT
X
Units 18,000 20,000
Particulars CPU Amount CPU Amount
Sales 85 15,30,000 120 24,00.000
Less: Variable Cost 38 6,84,000 45 9.00.000
Contribution 47 8.46,000 75 15,00.000
Less: Fixed Cost 4,00,000 6,00.000
EBIT 4,46,000 9.00.000
Less: Interest 1,25,000 80.000
EBT 3,21,000 8,20,000
(Gi)Operating Leverage:
Contribution 8,46,000 1.89 15,00,000 1.67
EBIT 4,46,000 9,00,000
EBIT
(iv)Financial Leverage = EBT 4,46,000 1.39 9,00.000 1.09
3,21,000 8.20,000
Illustration 25: (Nov. 17)
Following are the details of two companies XandY
Particulars 20
Variable cost per unit (Rs.)
| Fixed cost per ännum (Rs.) 7.00.000 14,00.000
Seling Price per unit (Rs.) 30 40
Output Per annum (units) 60.000 1.20,000
Interest on Debentures (Rs. 20.000 30,C00
Calculate:
Operating Leverage
0 Financial Leverage of two companies
Solution:
INCOME STATEMENT

Units 60,000 1,20,000

CPU Amount CPU Amount
Particularss
Sales 30 18,00,000 40 48,00,000
10 6,00,000 20 24,00,000
Less: Variable Cost 20 24,00,000
12,00,000
Contribution 20
7,00.000 14,00,000
Less: Fixed Cost 5.00,000 10,00,000
EBIT
Less: Interest 20.000 30,000
4,80,000 9,70,000
EBT
24,00,000
( Operating Leverage"Contribution 12,00,000 24 10,00,000
2.4

5,00,000
EBIT
5,0,000 1.04
10,00,000 1 1.03
M) Financial EBIT 9,70,000
Leverage= EBT 4,80,000