Page 177 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes A B C
Variable expenses on % of sales 66 2/3 75 50
Interest expenses 200 300 1000
Degree of operating leverage 5-1 6-1 2-1
Degree of financial leverage 3-1 4-1 2-1
Income tax rate. 50% 50% 50%

Prepare income statement for A, B and C.
9. X Corporation has estimated that for a new product its break-even point is 2,000 units of
P. This item is sold for 14%( identified variable cost 7 per unit). Calculate the degree of
operating leverage for sales volume of 2,500 units and 3,000 units. What do you infer from
the degree of operating leverage at the sales volume of 2,500 units and 3,000 units and
their differences, if any?

10. ABC companies capital structure is of 5 lakh, [ 100 each share] and 10 per cent debt
capital equity of 2,00,000. The sales are increased by 20 per cent from 50,000 to 60,000
units. 10 is the selling price per unit, and 6 is variable cost per unit and fixed expenses
amount to 1,00,000. Tax rate is 10 per cent calculate.
(a) Percentage increase in EPS

(b) The degree of operating leverage at 5,0000 units and 60,000 units
(c) The degree of financial leverage at 50,000 units and 60,000 units
11. Calculate operating and financial leverages under situations A, B and C and Financial plan
1,2, and 3 respectively from the following functions of XYZ Co. Also find out the
combination of operating and financial leverage that gives the highest value and least
value:
Installed capacity = 12,000 units;
Actual production & sales = 800 units
Selling price = 15 p.u;

Variable cost = 10 p.u
Fixed Cost = Situation A, 1000; Situation B, 2000; Situation C, 3000
12. Calculate the degree of operating leverage, degree of financial leverage, and the degree of
combined leverage for the following firms and interpret the results:
Particulars P Q R
Output (Units) 3,00,000 75,000 5,00,000
Fixed Cost ( ) 3,50,000 7,00,000 75,000
Variable Cost per unit ( ) 1.00 7.5 0.1
Interest Expenses ( ) 25,000 40,000 ----
Selling Price per unit ( ) 3.00 25.00 0.50

13. From the following data, calculate operating leverage.

Year EBIT ( ) Sales in units
1998 60,000 3,00,000
1999 70000 3,60,000

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