CA Inter P6 · Chapter 6 · Question 1 of 9
Annual sales of Mehta Castings are ₹ 40,00,000, variable costs are 60% of sales and fixed operating costs are ₹ 6,00,000. The degree of operating leverage is:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) 1.60
Explanation
Contribution = ₹ 40,00,000 x 40% = ₹ 16,00,000. EBIT = ₹ 16,00,000 - ₹ 6,00,000 = ₹ 10,00,000. DOL = contribution / EBIT = ₹ 16,00,000 / ₹ 10,00,000 = 1.60. So a 1% change in sales leads to a 1.6% change in EBIT.
More Financing Decisions – Leverages MCQs
- Q3A firm has a degree of operating leverage of 2 and a degree of financial leverage of 1.5. If sales increase by 10%, earnings per share…
- Q4Sunrise Ltd has a degree of combined leverage of 4 and a degree of operating leverage of 2.5. Its EBIT is ₹ 8,00,000 and it has no…
- Q5Operating leverage arises because of:
- Q6A company pays annual debenture interest of ₹ 3,00,000 and preference dividend of ₹ 70,000. The tax rate is 30%. Its financial break-even…
- Q7When a firm operates exactly at its operating break-even point, its degree of operating leverage is: