Sales 25,00.000 Less: Variable cost 15,00,000 Contribution 10,00,000 Less: Fixed cost 5,00,000 Operating Profit 5,00,000 Combined leverage = Operating leverage x Financial leverage Calculation of financial leverage Contribution 10,00,000 = 2 5,00,000 Operating Profit Calculation of financial leverage Earning before Interest and Tax (EBIT) Less: Interest on Debenture (8% of 12,50,000) Earnings before Tax 5,00,000 1,00,000 4,00,000 Operating leverage = Operating Profit Earning Before Tax 5,00,000 4,00,000 = 1.25 Combined leverage = 2 x 1.25 = 2.5 Exercise 5 Calculate the operating, financial and combined leverage under situations 1 and 2 the financial plans for X and Y respectively from the following information relating to operating and capital structure of a company, and also find out which gives the highest the least value ? Installed capacity is 5000 units. Annual Production and sales at 60% installed capacity Selling price per unit Rs. 25 Variable cost per unit Rs. 15 Fixed cost: Situation 1 : Rs. 10,000 Situation 2 : Rs. 12,000 30 ex 5 only