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