The capital structure of Bombay Refrigeration Company Ltd. Consist of an equity share capital of Rs.3,00,000 (share of Rs.10 per value) and Rs.3,00,000 10% debentures. Sales increased by 20% from 30,000 to 36,000 units, the selling price are Rs.10 per unit. Variable cost Rs.6 Per unit and fixed costs amount to Rs.50,000. The company’s tax rate is 50%.
You are required to compute the degree of operating leverage, degree of financial language and degree of combined leverage.
Ans.
| | | Last Year | Next Year |
| 1) | Quantity | 30000 | 36000 |
| 2) | Selling Price | Rs.10 | Rs.10 |
| 3) | Variable Costs | Rs.6 | Rs.6 |
| 4) | Contribution Per Unit | Rs.4 | Rs.4 |
| 5) | Contribution (1x4) | 120000 | 144000 |
| 6) | Fixed Costs | 50000 | 50000 |
| 7) | EBIT (5-6) | 70000 | 94000 |
| 8) | Interest | 30000 | 30000 |
| 9) | Profit before Tax | 40000 | 64000 |
| 10) | Profit after tax (50%x9) | 20000 | 32000 |
Change in EBIT %
(A) 
Degrees of Operating Leverage (DDL) = x 100
Degrees of Operating Leverage (DDL) = x 100 Change in contribution %
Change in EBIT
Change in EBIT (%) = x 100 Original EBIT
24000
= x 100 70000
= 34.29%
Change in Contribution
Change in contribution change in % = x 100 Contribution
24000
= x 100 120000
= 20%
34.29
20
= 171.45%
Change in PAT %
(B) Degrees of Financial Leverage (DFL) = x 100
Degrees of Financial Leverage (DFL) = x 100 Change in EBIT %
Change in PAT
Change in PAT (%) = x 100 Original PAT
12000
= x 100 20000
= 60 %
60
DFL = x 100 34.29
= 175%
(C) Degree of Combined leverage = DOL x DFL
= 171.45 x 175
= 30004.
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