From the following data, calculate the degree of operating leverage of the two companies X Ltd. and Y Ltd. : X Ltd. Y Ltd. Sales (₹) 20,00,000 25,00,000 Variable expenses 40% 30% Fixed cost (₹) 5,00,000 10,00,000 Also st
CS Executive · Financial and Strategic Management · PYQS · December 2018
From the following data, calculate the degree of operating leverage of the two companies X Ltd. and Y Ltd. : X Ltd. Y Ltd. Sales (₹) 20,00,000 25,00,000 Variable expenses 40% 30% Fixed cost (₹) 5,00,000 10,00,000 Also state which company has the greater business risk and why ?
Answer & Explanation:
Answer 2(c) Particulars X Ltd. (₹) Y Ltd. (₹) Sales 20,00,000 25,00,000 Less: variable cost (8,00,000) (7,50,000) Contribution 12,00,000 17,50,000 Less: Fixed cost (5,00,000) (10,00,000) EBIT 7,00,000 7,50,000 Degree of operating leverage (DOL) = Contribution / EBIT DOL for X Ltd. = 12,00,000 / 7,00,000 = 1.71 DOL for Y Ltd. = 17,50,000 / 7,50,000 = 2.33 Operating leverage of Y Ltd. is higher than that of X Ltd. In Y Ltd., the EBIT is likely to vary more with fluctuation in sales and hence it has higher degree of operating risk.
Topics: Financial Management
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