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Operating Leverage (in Hindi)
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Heena Malhotra
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U
Unacademy user
can u plz explain what is higher than BEP then there will be positive leverage
thank u so much mam
thanku maam its easy to understand really thanku
Heena Malhotra
a year ago
My Pleasure :) :)
  1. Financial Decisions- Leverage By Heena Malhotra


  2. Analysis of Leverage Types of Leverage (i) Operating Leverage (ii) Financial Leverages (iii) Combined Leverages Business and Financial Risk By Heena Malhotra


  3. MEANING AND TYPES OF LEVERAGE O Leverage refers to the ability of a firm in employing long term funds having a fixed cost, to enhance returns to the owners. o In other words, leverage is the amount of debt that a firm uses to finance its assets. A firm with a lot of debt in its capital structure is said to be highly levered. A firm with no debt is said to be unlevered. o Leverage can occur in either the operating or financing portions of the income statement. By Heena Malhotra


  4. Profitability Statement Sales Less: Variable Cost Contribution Less: Fixed Cost Operating Profit/ EBIT Less: Interest Earnings Before Tax (EBT) Less: Tax Profit After Tax (PAT) Less: Pref. Dividend (if any) Net Earnings available to equity shareholders/ PAT No. Equity shares (N) Earnings per Share (EPS) = (PAT N) xxX Operating (xxxLevarage Combined Levarage xxxFinancial Levarage xXX By Heena Malhotra


  5. Operating Leverage o Operating leverage (OL) may be defined as the employment of an asset with a fixed cost in the hope that sufficient revenue will be generated to cover all the fixed and variable costs. O The use of assets for which a company pays a fixed cost is called operating leverage. By Heena Malhotra


  6. Profitability Statement Sales Less: Variable Cost Contribution Less: Fixed Cost Operating Profit/ EBIT Less: Interest Earnings Before Tax (EBT) Less: Tax Profit After Tax (PAT) Less: Pref. Dividend (if any) Net Earnings available to equity shareholders/ PAT No. Equity shares (N) Earnings per Share (EPS) = (PAT N) xxX Operating (xxxLevarage Combined Levarage xxxFinancial Levarage xXX By Heena Malhotra


  7. Operating leverage is a function of three factors: ( Amount of fixed cost () Variable contribution margin and (iii) Volume of sales. Contribution(C) Eamings before interest and tax(EBIT) OperatingLeverage(Oy- Where, Contribution (C) Sales-Variable cost EBIT Sales-Variable cost - Fixed cost By Heena Malhotra


  8. Break-Even Analysis and Leverage o Break-even analysis is a generally used method to study the Cost Volume Profit analysis. o This technique can be explained in two ways: o (i) It is concerned with computing the break-even point. At this point of production level and sales there will be no profit and loss i.e. total cost is equal to total sales revenue. o (ii) This technique is used to determine the possible profit/ loss at any given level of production or sales By Heena Malhotra


  9. Fixed Cost Contribution per unit Break-even point in units By Heena Malhotra


  10. Particulars Product X Product Y 20 Selling Price Variable Cost Contribution Total Contribution of 1,000 units Fixed Cost Profit (EBIT) 40 20 20 20,000 15,000 5,000 12 8,000 5,000 3,000 15,000 20 = 750 units 15,000-625 units 8 Break- even point (Fixed Cost / Contribution Operating Leverage (0040267 Contribution EBIT 20,000 5,000 3,000 26 ra


  11. Fixed cost Operating leverage 1. High fixed cost 2. Lower fixed cost 1. High degree of operating leverage 2. Lower degree of operating leverage Analysis and Interpretation of operating leverage S. No. Situation 1 No Fixed Cost Higher Fixed cost 3. Higher than Break-even level Positive operating leverage Result No operating leverage Higher Break-even point 2. 4. Lower than Break-even level Negative operating leverage By Heena Malhotra


  12. Degree of Operating Leverage (DOL) The operating leverage may also be defined as "the firm's ability to use fixed operating cost to magnify the effects of changes in sales on its earnings before interest and taxes." Percentage change in EBIT Percentage change in Sales Degree of Operating Leverage (DOL) or A EBIT EBIT Sales Sales EBIT means changes in EBIT Sales means changes in sales By Heena Malhotra


  13. Situation 3: When EBIT is Nil contribution fixed cost) Degree of Operating Leverage (DOL) Contributon Undefined By Heena Malhotra


  14. Question A Company produces and sells 10,000 shirts. The selling price per shirt is 500. Variable ost is 200 per shirt and fired operating cost is t 25,00,000 () Calculate operating leverage. (b) If sales are up by 10%, then what is the impact on EBIT? By Heena Malhotra


  15. Calculate the operating leverage for each of the four firms A, B, C and D from the following price and cost data: Firms A R) Sale price per unit Variable cost per unit Fixed operating cost What calculations can you draw with respect to levels of fixed cost and the degree of 32 16 40,000 50 20 1,00,000 70 50 Nil 20 60,000 operating leverage result? Explain. Assume number of units sold is 5,000 By Heena Malhotra


  16. SOLUTION Particulsrs Firms Sales (units) Sales revenue (Units x price) (?) Less: Variable cost | 1,00,000 | (30,000) (80,000) (1,00,000) (2,50,000) 1,60,000 | 2,50,000| 3,50,000 (Units x variable cost per unit) (e) Less: Fixed operating costs (R) EBIT Nil 50,000 1,00,000 (60,000) (40,000) (1,00,000) 10,000 40,000 Current sales (S) Variable costs (VC) Current EBIT DOL = By Heena Malhotra


  17. 1,00,000 30,000 10,000 DOLA DOL(B) = DOL = , 60, 000-780, 000 740,000 2,50,000 1,00,000 DOL50,000 DOL(D) = 1,00,000 3,50,000-72,50,000- The operating leverage exists only when there are fixed costs. In the case of firm D, there is no magnified effect on the EBIT due to change in sales. A 20 per cent increase in sales has resulted in a 20 per cent increase in EBIT. In the case of other firms, operating leverage exists. It is maximum in firm A, followed by firm C and minimum in firm B. The interception of DOL of 7 is that1 per cent change in sales results in 7 per cent change in EBIT level in the direction of the change of sales level of firm A. By Heena Malhotra