CA Intermediate · Financial Management and Strategic Management · Financing Decisions - Leverages
A firm has contribution of Rs 12,00,000 and its DOL is 4. What is its fixed operating cost?
Fixed operating cost is Rs 9,00,000. With DOL of 4, EBIT equals contribution divided by 4, which is Rs 3,00,000, and fixed cost is contribution minus EBIT, so 12,00,000 - 3,00,000 = Rs 9,00,000.
- ARs 3,00,000
- BRs 9,00,000Correct
- CRs 8,00,000
- DRs 4,00,000
Explanation
DOL = Contribution / EBIT, so EBIT = 12,00,000 / 4 = Rs 3,00,000. Fixed cost = Contribution - EBIT = 12,00,000 - 3,00,000 = Rs 9,00,000. Rs 3,00,000 is EBIT, not fixed cost.
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