(^92) Financial Management
Variable Cost Rs. 15 per Unit
Fixed cost:
Under Situation I Rs. 15, 000
Under Situation II Rs. 20,000
Capital structure: Rs.
Financial Plan A B
Equity 10,000 15,000
Debt (rate of Interest at 20%) 10,000 5,000 d
20,000 20,000
Solution: (i) Calculation of Operating Leverage
Operating Leverage = (Contribution/operating profit)
Rs.
Situation I Situation II
Sales 90,000 90,000
Less: variable cost 45,000 45,000
(3,00 unit@ Rs. 30 per unit)
Contribution 45,000 45,000
Less: Fixed Costs 15,000 20,000
Operating profit (EBIT) 30,000 25,000
Operating Leverage =
Rs. 45,000
Rs. 30,000 = 1.5
Rs. 45,000
Rs. 25,000=1.8
(ii) Calculation of financial leverage
Financial leverage =
Operating profit
Profit before tax
Financial plan A B
Situation I 30,000 30,000
Operation profit
Less: Interest on debt 2,000 1,000
profit before tax PBT 28,000 29,000
Financial leverage =
Rs. 30,000
Rs. 28 000,
=
Rs
Rs