Hindustan Chemical Ltd. has operating and capital structure with financial plan A and B under situations I and II. Annual production and sales are 75% of installed capacity.Compute the operating, financial and combined l

1. Calculate Annual Production and Sales: Annual Production and Sales = 75% of 10,000 units = 7,500 units 2. Calculate Contribution per unit: Contribution per unit = Selling price per unit - Variable cost per unit = ₹40 - ₹20 = ₹20 3. Calculate Total Contribution: Total Contribution = 7,500 units x ₹20 = ₹1,50,000 4. Calculate Interest Expense: Financial Plan A (Debt ₹40,000 @ 12%) = ₹40,000 x 12% = ₹4,800 Financial Plan B (Debt ₹30,000 @ 12%) = ₹30,000 x 12% = ₹3,600 5. Income Statement for each situation: Particulars Financial Plan A Financial Plan B Situation I (₹) Situation II (₹) Situation I (₹) Situation II (₹) Contribution 1,50,000 1,50,000 1,50,000 1,50,000 Less: Fixed Costs 15,000 18,000 15,000 18,000 Operating Profit or EBIT 1,35,000 1,32,000 1,35,000 1,32,000 Less: Interest on Debt (Financial Plan A) 4,800 4,800 - - (Financial Plan B) - - 3,600 3,600 Earnings Before Tax (EBT) 1,30,200 1,27,200 1,31,400 1,28,400 6. Calculate Leverages: Operating Leverage (OL) = Contribution / EBIT Financial Leverage (FL) = EBIT / EBT Combined Leverage (CL) = OL x FL = Contribution / EBT Particulars Financial Plan A Financial Plan B Situation I Situation II Situation I Situation II Contribution 1,50,000 1,50,000 1,50,000 1,50,000 EBIT 1,35,000 1,32,000 1,35,000 1,32,000 EBT 1,30,200 1,27,200 1,31,400 1,28,400 Operating Leverage (OL) 1,50,000/1,35,000 = 1.11 1,50,000/1,32,000 = 1.14 1,50,000/1,35,000 = 1.11 1,50,000/1,32,000 = 1.14 Financial Leverage (FL) 1,35,000/1,30,200 = 1.04 1,32,000/1,27,200 = 1.04 1,35,000/1,31,400 = 1.03 1,32,000/1,28,400 = 1.03 Combined Leverage (CL) 1.11 x 1.04 = 1.15 1.14 x 1.04 = 1.19 1.11 x 1.03 = 1.14 1.14 x 1.03 = 1.17 Interpretation of Combined Leverage: Highest Value: 1.19 under Situation II of Financial Plan A Situation II of Financial Plan A at 1.19 shows the highest risk (both operating risk as well as financial risks are high). As a result, any change in sales will have a higher impact on EPS. Lowest Value: 1.14 under Situation I of Financial Plan B Situation I of Financial Plan B at 1.14 shows the lowest combined risk (both operating risk as well as financial risks are low). As a result, any change in sales will have a lesser impact on EPS.