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

Meera Ltd has fixed operating costs of ₹3,00,000, and its contribution is ₹9,00,000. By what amount does EBIT change if sales increase such that contribution rises by ₹1,50,000, fixed costs remaining unchanged?

EBIT rises by ₹1,50,000. Because fixed operating costs stay constant, the whole increase in contribution falls straight through to operating profit. EBIT moves from ₹6,00,000 to ₹7,50,000, which is the source of operating leverage.

  1. A₹1,50,000Correct
  2. B₹50,000
  3. C₹4,50,000
  4. D₹3,00,000

Explanation

With fixed costs unchanged, every rupee of extra contribution flows to EBIT. EBIT moves from 6,00,000 to 7,50,000, a rise of ₹1,50,000. Option B wrongly divides by the DOL of 1.5.

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