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

Sharma Traders sells 10,000 units at Rs 50 per unit. Variable cost is Rs 30 per unit and fixed operating cost is Rs 1,00,000. Interest on debt is Rs 40,000. What is the degree of combined leverage?

Combined leverage is contribution divided by profit before tax. Contribution is Rs 2,00,000 and profit before tax is Rs 60,000 after fixed costs of Rs 1,00,000 and interest of Rs 40,000, so the degree of combined leverage is 3.33.

  1. A2.00
  2. B1.25
  3. C2.50Correct
  4. D3.33

Explanation

Contribution = 10,000 x (50-30) = Rs 2,00,000. EBIT = 2,00,000 - 1,00,000 = Rs 1,00,000. PBT = 1,00,000 - 40,000 = Rs 60,000. DOL = 2,00,000/1,00,000 = 2. DFL = 1,00,000/60,000 = 1.667. DCL = 2 x 1.667 = 3.33, equivalently 2,00,000/60,000 = 3.33. Hence option 4 is correct by calculation; check below.

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