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CMA Intermediate · Financial Management and Business Data Analytics · Leverage Analyses and EBIT - EPS Analysis

Kavya Foods Ltd has sales of ₹10,00,000, variable costs of ₹6,00,000, fixed operating costs of ₹2,00,000 and interest of ₹1,00,000. What is its degree of combined leverage?

DCL is contribution divided by earnings before tax. Contribution is ₹4,00,000 and EBT is ₹1,00,000, so DCL is 4.00. This equals DOL of 2 multiplied by DFL of 2.

  1. A2.00
  2. B4.00Correct
  3. C3.00
  4. D2.67

Explanation

Contribution = 10,00,000 - 6,00,000 = 4,00,000. EBIT = 4,00,000 - 2,00,000 = 2,00,000. EBT = 1,00,000. DCL = Contribution/EBT = 4,00,000/1,00,000 = 4.00 (check: DOL 2 x DFL 2 = 4). Using EBIT/EBT only gives 2.00, which is DFL alone.

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