Firm ‘A’ has a annual sale of Rs 80,00,000 and variable cost is Rs 50,00,000.Fixed cost is Rs 5,00,000 per year. Company has 11% debentures of Rs30,00,000. Find out operating leverage and financial leverage of the firm

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.

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