From the following given operating data, calculate the degree of operating leverage of the two companies: ABC Ltd. XYZ Ltd. Sales (₹) 40 lakh 50 lakh Variable expense (as % of sales) 40% 30% Fixed cost (₹) 10 lakh 20 lak
CS Professional · Financial, Treasury and Forex Management · PYQS · December 2015
From the following given operating data, calculate the degree of operating leverage of the two companies: ABC Ltd. XYZ Ltd. Sales (₹) 40 lakh 50 lakh Variable expense (as % of sales) 40% 30% Fixed cost (₹) 10 lakh 20 lakh Also, state which company has the greater business risk and why?
Answer & Explanation:
(₹ in lakh) ABC Ltd. XYZ Ltd. Sales 40 50 Less: variable cost (16) (15) Contribution 24 35 Less: Fixed cost 10 20 EBIT 14 15 Degree of Operating leverage = Contribution/EBIT 24/14 = 1.71 35/15 = 2.33 XYZ Ltd. has a higher degree of operating leverage. In this company, the EBIT is likely to vary more with fluctuation of sales. Therefore XYZ Ltd. has a higher degree of operating risk.
Topics: Financial Analysis
Related Questions in this Topic
- The following data relates to Ribbon Ltd. : Earning Before Interest and Taxes (EBIT): ₹30,00,000 Profit after Tax: ₹13,5...
- The following details are provided by the CFO of the Viju Ltd., to his newly appointed Executive Assistant. This informa...
- M/s Abacus Ltd. has decided to fill up the position of finance officer. To test the analytical capacity of applicant, fo...
- High return on investment (ROI) indicates efficient use of assets. Comment.
- The following annual figures relate to M Ltd. ₹ Sales (with two months' credit) 36,00,000 Materials consum...