CA Intermediate · Financial Management and Strategic Management · Financing Decisions - Leverages
Sundaram Traders sells 20,000 units at ₹100 per unit. Variable cost is ₹60 per unit and fixed operating cost is ₹4,00,000. Interest on debt is ₹1,00,000. What is the degree of combined leverage?
The degree of combined leverage is 2.67. Contribution is ₹8,00,000, EBIT is ₹4,00,000 and profit before tax is ₹3,00,000. Dividing contribution by profit before tax gives 2.67, which equals operating leverage of 2 multiplied by financial leverage of 1.33.
- A2.67Correct
- B2.00
- C1.33
- D2.50
Explanation
Contribution = 20,000 × 40 = ₹8,00,000. EBIT = 8,00,000 − 4,00,000 = ₹4,00,000. EBT = 4,00,000 − 1,00,000 = ₹3,00,000. DCL = Contribution/EBT = 8,00,000/3,00,000 = 2.67. Check: DOL = 2, DFL = 1.33, product 2.67. Option 2.00 is DOL only.
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