Skip to content

CA Intermediate · Financial Management and Strategic Management · Financing Decisions - Leverages

A firm has contribution of Rs 9,00,000, fixed operating costs of Rs 6,00,000 and interest of Rs 1,50,000. If sales fall by 10%, by what percentage will profit before tax fall?

Profit before tax will fall by 60%. Combined leverage equals contribution of Rs 9,00,000 divided by profit before tax of Rs 1,50,000, which is 6. A 10% fall in sales therefore causes a 60% fall in profit before tax.

  1. A20%
  2. B30%
  3. C60%Correct
  4. D40%

Explanation

EBIT = 9,00,000 - 6,00,000 = 3,00,000. PBT = 3,00,000 - 1,50,000 = 1,50,000. DCL = contribution/PBT = 9,00,000/1,50,000 = 6. Fall in PBT = 6 x 10% = 60%. Check: contribution falls by 90,000, so PBT falls to 60,000, a drop of 60%. The 30% option uses DOL of 3 only.

Did you get it right without looking?

One question tells you little. A timed set on Financing Decisions - Leverages shows your real accuracy, how long you take and where you lose marks.

Practise Financing Decisions - LeveragesFree diagnostic mock

More Financing Decisions - Leverages questions