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

Sahyadri Foods Ltd has sales of ₹10,00,000, variable costs of ₹6,00,000 and fixed operating costs of ₹2,00,000. Interest on debt is ₹50,000. What is its degree of combined leverage?

Degree of combined leverage is 2.67. Contribution is ₹4,00,000, EBIT is ₹2,00,000 and EBT is ₹1,50,000, so contribution divided by EBT gives 2.67. This equals operating leverage of 2 multiplied by financial leverage of 1.33.

  1. A1.60
  2. B2.00
  3. C2.67
  4. D3.20Correct

Explanation

Contribution = 10,00,000 - 6,00,000 = 4,00,000. EBIT = 4,00,000 - 2,00,000 = 2,00,000. EBT = 2,00,000 - 50,000 = 1,50,000. DOL = 4,00,000/2,00,000 = 2; DFL = 2,00,000/1,50,000 = 1.33; DCL = 2 x 1.33 = 2.67. Check: Contribution/EBT = 4,00,000/1,50,000 = 2.67. The value 2.00 is only operating leverage.

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