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Calculate the Operating Leverage, Financial Leverage and Combined Leverage from thefollowing data under situation I and II and Financial Plan A & B

Calculate the Operating Leverage, Financial Leverage and Combined Leverage from the
following data under situation I and II and Financial Plan A & B.

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Installed Capacity 4000 units
Actual Production & Sales 75% of the Capacity
Selling Price Rs. 30 per unit
Variable Cost Rs. 15 per unit
Fixed Cost
Under Situation I Rs. 15,000
Under Situation II Rs. 20, 000

Capital Structure
Particulars Financial Plan
A B
Equity 10,000 15,000
Debt (rate of Interest at 20%) 10,000 5,000
20,000 20,000

To calculate operating leverage, financial leverage, and combined leverage, we’ll first need to calculate the relevant values. Let’s define the terms:

  • (Q) = Quantity of units produced and sold
  • (P) = Selling price per unit
  • (V) = Variable cost per unit
  • (FC) = Fixed costs
  • (EBIT) = Earnings Before Interest and Taxes
  • (EBT) = Earnings Before Taxes

Given Data:

  • Installed Capacity = 4,000 units
  • Actual Production & Sales = 75% of the Capacity ( (Q = 0.75 \times 4,000) units)
  • Selling Price ((P)) = Rs. 30 per unit
  • Variable Cost ((V)) = Rs. 15 per unit
  • Fixed Cost ((FC)) under Situation I = Rs. 15,000
  • Fixed Cost ((FC)) under Situation II = Rs. 20,000
  • Equity = Rs. 10,000 for Financial Plan A, Rs. 15,000 for Financial Plan B
  • Debt = Rs. 10,000 with an interest rate of 20% for Financial Plan A, Rs. 5,000 for Financial Plan B

Now, let’s calculate the values step by step:

Situation I:

  1. Operating Leverage (OL):
    [ OL = \frac{Q(P – V)}{Q(P – V) – FC} ]
  2. Financial Leverage (FL):
    [ FL = \frac{EBIT}{EBT} = \frac{Q(P – V) – FC}{Q(P – V) – FC – (Debt \times Interest)} ]
  3. Combined Leverage (CL):
    [ CL = OL \times FL ]

Situation II:

Repeat the calculations for Situation II using the given data under Situation II.

Financial Plan A:

  1. Operating Leverage (OL):
    [ OL = \frac{Q(P – V)}{Q(P – V) – FC} ]
  2. Financial Leverage (FL):
    [ FL = \frac{EBIT}{EBT} = \frac{Q(P – V) – FC}{Q(P – V) – FC – (Debt \times Interest)} ]
  3. Combined Leverage (CL):
    [ CL = OL \times FL ]

Financial Plan B:

Repeat the calculations for Financial Plan B using the given data under Financial Plan B.

Now, plug in the values into the formulas and calculate the leverages for each scenario and financial plan.