ABC Ltd. has an average selling price of ₹10 per unit. Its variable unit costs are ₹7 and fixed costs amount to ₹1,70,000. It finances all its assets by equity funds. It pays 30% tax on its income. PQR Ltd. is identical

No. of units sold = ₹7,00,000 / ₹10 = 70,000 units Determination of various leverages Particulars ABC Ltd. (₹) PQR Ltd. (₹) Sales revenue 7,00,000 7,00,000 Less: Variable cost (70,000 * ₹7) (4,90,000) (4,90,000) Contribution 2,10,000 2,10,000 Less: Fixed cost (1,70,000) (1,70,000) EBIT 40,000 40,000 Less: Interest - (20,000) EBT 40,000 20,000 Less: Tax @ 30% (12,000) (6,000) EAT 28,000 14,000 Degree of Operating Leverage 2,10,000/40,000 2,10,000/40,000 DOL = Contribution/EBIT = 5.25 = 5.25 Degree of Financial Leverage 40,000/40,000 40,000/20,000 DFL = EBIT/ EBT - Interest = 1 = 2 Degree of Combined Leverage 2,10,000/40,000 2,10,000/20,000 DCL = Contribution/ EBIT - Interest = 5.25 = 10.5 Interpretation The degree of combined leverage of ABC Ltd. is higher than PQR Ltd. due to Financial Leverage. The 1% change in sales of ABC Ltd. will lead to 5.25% change in EPS of ABC Ltd., whereas 1% change in sales of PQR Ltd. will lead to 10.5% change in EPS of PQR Ltd.