You are given two financial plans of a company which has two financial situations. The detailed information are as under: Installed capacity: 10,000 units Actual production and sales: 60% of installed capacity Selling pr

Calculation of Operating Leverage and Financial Leverage Common Calculations: Installed capacity = 10,000 units Actual production and sales = 60% of 10,000 = 6,000 units Selling price per unit = ₹30 Variable cost per unit = ₹20 Contribution per unit = Selling price per unit - Variable cost per unit = ₹30 - ₹20 = ₹10 Total Contribution = 6,000 units × ₹10 = ₹60,000 Financial Plans and Situations: Particulars Financial Plan PQ Financial Plan MN Situation A (₹) B (₹) A (₹) B (₹) Contribution 60,000 60,000 60,000 60,000 Less: Fixed cost 20,000 25,000 20,000 25,000 Operating Profit or EBIT 40,000 35,000 40,000 35,000 Less: Interest (12% of Debt) Plan PQ (12% of ₹40,000) 4,800 4,800 Plan MN (12% of ₹10,000) 1,200 1,200 Earning Before Tax (EBT) 35,200 30,200 38,800 33,800 Operating Leverage (OL) Calculation: OL = Contribution / EBIT Plan PQ, Situation A: OL = 60,000 / 40,000 = 1.5 Plan PQ, Situation B: OL = 60,000 / 35,000 ≈ 1.71 Plan MN, Situation A: OL = 60,000 / 40,000 = 1.5 Plan MN, Situation B: OL = 60,000 / 35,000 ≈ 1.71 Financial Leverage (FL) Calculation: FL = EBIT / EBT Plan PQ, Situation A: FL = 40,000 / 35,200 ≈ 1.14 Plan PQ, Situation B: FL = 35,000 / 30,200 ≈ 1.16 Plan MN, Situation A: FL = 40,000 / 38,800 ≈ 1.03 Plan MN, Situation B: FL = 35,000 / 33,800 ≈ 1.04