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A company's Sales, Variable cost and fixed cost are Rs. 75,00,000; Rs. 42,00,000 and Rs. 6,00,000 respectively. It has borrowed Rs. 45,00,000 at 9%pa. What is the degree of operating leverage of the company?1.441.222.551.18

Question

A company's Sales, Variable cost and fixed cost are Rs. 75,00,000; Rs. 42,00,000 and Rs. 6,00,000 respectively. It has borrowed Rs. 45,00,000 at 9%pa. What is the degree of operating leverage of the company?1.441.222.551.18

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Solution

The degree of operating leverage can be calculated using the formula:

Degree of Operating Leverage = Contribution Margin / Operating Profit

First, we need to calculate the Contribution Margin and Operating Profit.

  1. Contribution Margin = Sales - Variable Costs = Rs. 75,00,000 - Rs. 42,00,000 = Rs. 33,00,000

  2. Operating Profit = Contribution Margin - Fixed Costs = Rs. 33,00,000 - Rs. 6,00,000 = Rs. 27,00,000

Now, we can calculate the Degree of Operating Leverage:

Degree of Operating Leverage = Rs. 33,00,000 / Rs. 27,00,000 = 1.22

So, the degree of operating leverage of the company is 1.22.

This problem has been solved

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