To find the operating leverage and financial leverage of Firm A, we need to first calculate the contribution margin, operating income, and net income:
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Contribution Margin = Sales – Variable Costs
Contribution Margin = Rs 80,00,000 – Rs 50,00,000
Contribution Margin = Rs 30,00,000
Operating Income = Contribution Margin – Fixed Costs
Operating Income = Rs 30,00,000 – Rs 5,00,000
Operating Income = Rs 25,00,000
Net Income = Operating Income – Interest Expense
Net Income = Rs 25,00,000 – (11% of Rs 30,00,000)
Net Income = Rs 21,70,000
Now, we can calculate the operating leverage and financial leverage:
Operating Leverage = Contribution Margin / Operating Income
Operating Leverage = Rs 30,00,000 / Rs 25,00,000
Operating Leverage = 1.2
This means that a 1% increase in sales will lead to a 1.2% increase in operating income.
Financial Leverage = Operating Income / Net Income
Financial Leverage = Rs 25,00,000 / Rs 21,70,000
Financial Leverage = 1.15
This means that a 1% increase in operating income will lead to a 1.15% increase in net income.
Therefore, the operating leverage of Firm A is 1.2 and the financial leverage is 1.15.