1. Chandrasekar is running a company manufacturing and selling electronic toy wi

Question

1. Chandrasekar is running a company manufacturing and selling electronic toy with the installed capacity of 1,00,000 quantities per annum. It is currently selling at 75,000 units. The cost sheet is given below:

a. Price per unit 200

b. Variable cost per unit 120

c. Fixed cost 20,00,000

d. Interest 12,00,000

e. Tax rate 35%

f. No. of outstanding shares 10,00,000

As per next year forecast there are two possibilities i) the selling will come down by 15,000 units ii) the selling may reach the full installed capacity. In each case, what contributed the profit or loss (Operating and financial leverages).

a. How will you use the degree of leverages to calculate new EBIT and new EPS?

b. Now check with income statement the results are correct or not.

c. Calculate the new DOL, DFL & DCL and comment

Explanation / Answer

Schedule of Contribution of Profit and Loss Possibilities-(i) Possibilities-(ii) Selling quantity of electronic Toy A 60,000 1,00,000 Price per unit B      200         200 Variable Cost Per unit C      120         120 Contribution Per Unit D        80           80 Total Contribution Amount E=A*D 48,00,000 80,00,000 Fixed Cost F 20,00,000 20,00,000 Earning Before Interest And Taxes (EBIT) G=E-F 28,00,000 60,00,000 Interest H 12,00,000 12,00,000 Earning Before Tax I 16,00,000 48,00,000 Tax @ 35% J=I*35% 5,60,000 16,80,000 Earning After Tax K=I-J 10,40,000 31,20,000 No. Of Shares L 10,00,000 10,00,000 Earning Per Share (EPS) M=K/L 1.04 3.12 Operating Leverages = Contribution/Net Profit After Tax Contribution/Net Profit After Tax = 4800000/1040000 8000000/3120000 = 4.62 2.56 Financial Leverages = Earning Before Interest and Tax/Earning Before Tax Earning Before Interest and Tax/Earning Before Tax = 2800000/1600000 6000000/4800000 = 1.75 1.25 Degree of Operating Leverage = % Change in EBIT/% Change in Sales = % Change in EBIT/% Change in Sales = 30/20 = 50/25 = 1.5 = 2 Degree of Financial Leverage = % Change in EPS/% Change in EBIT = % Change in EPS/% Change in EBIT = 43/30 = 71/51 = 1.4 = 1.4 Degree of Combined Leverage = % Change in EPS/% Change in Sales = % Change in EPS/% Change in Sales = 43/20 = 71/25 = 2.15 = 2.84

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