Financial management
This query is : Resolved
Vikram Aditya
(Querist)
04 February 2013
What will be Operating Leverage if,
sale price p.u. 20
variabe cost p.u. 6
fixed operating 80000
cost.
Assume no. of units sold is 5000.
Pls answer
sale price p.u. 20
variabe cost p.u. 6
fixed operating 80000
cost.
Assume no. of units sold is 5000.
Pls answer
Vikram Aditya
(Querist)
04 February 2013
What will be Operating Leverage if,
sale price p.u. Rs20,
variabe cost p.u. Rs6,
fixed operating cost 80000
and assume no. of units sold is 5000.
Pls answer
sale price p.u. Rs20,
variabe cost p.u. Rs6,
fixed operating cost 80000
and assume no. of units sold is 5000.
Pls answer
24 July 2024
Operating leverage measures the sensitivity of a company's operating income to changes in sales volume. It is calculated using the following formula:
\[ \text{Operating Leverage} = \frac{\text{Contribution Margin}}{\text{Operating Income}} \]
Where:
- **Contribution Margin** = \( \text{Sales} - \text{Variable Costs} \)
- **Operating Income** = \( \text{Sales} - \text{Variable Costs} - \text{Fixed Operating Costs} \)
Given the data:
- Sale price per unit (\( P \)) = ₹20
- Variable cost per unit (\( V \)) = ₹6
- Fixed operating cost (\( F \)) = ₹80K
- Number of units sold (\( Q \)) = 5,000 units
### Step-by-Step Calculation:
1. **Calculate Contribution Margin:**
\[ \text{Contribution Margin} = \text{Sales} - \text{Variable Costs} \]
\[ \text{Contribution Margin} = (P \times Q) - (V \times Q) \]
\[ \text{Contribution Margin} = (20 \times 5000) - (6 \times 5000) \]
\[ \text{Contribution Margin} = 1L - 30,000 \]
\[ \text{Contribution Margin} = ₹70,000 \]
2. **Calculate Operating Income:**
\[ \text{Operating Income} = \text{Sales} - \text{Variable Costs} - \text{Fixed Operating Costs} \]
\[ \text{Operating Income} = (P \times Q) - (V \times Q) - F \]
\[ \text{Operating Income} = (20 \times 5000) - (6 \times 5000) - 80,000 \]
\[ \text{Operating Income} = 1L - 30K - 80K \]
\[ \text{Operating Income} = -10,000 \]
(Negative operating income indicates a loss; however, for the purpose of operating leverage calculation, we proceed with the absolute values.)
3. **Calculate Operating Leverage:**
\[ \text{Operating Leverage} = \frac{\text{Contribution Margin}}{\text{Operating Income}} \]
\[ \text{Operating Leverage} = \frac{70K}{10K} \]
\[ \text{Operating Leverage} = 7 \]
### Interpretation:
An operating leverage of 7 indicates that for every 1% change in sales volume, the operating income will change by approximately 7%. Operating leverage amplifies the impact of changes in sales volume on operating income, which in this case is significant due to the relatively high fixed operating costs compared to variable costs. This sensitivity can lead to higher profitability in periods of increasing sales but can also magnify losses in periods of declining sales.
\[ \text{Operating Leverage} = \frac{\text{Contribution Margin}}{\text{Operating Income}} \]
Where:
- **Contribution Margin** = \( \text{Sales} - \text{Variable Costs} \)
- **Operating Income** = \( \text{Sales} - \text{Variable Costs} - \text{Fixed Operating Costs} \)
Given the data:
- Sale price per unit (\( P \)) = ₹20
- Variable cost per unit (\( V \)) = ₹6
- Fixed operating cost (\( F \)) = ₹80K
- Number of units sold (\( Q \)) = 5,000 units
### Step-by-Step Calculation:
1. **Calculate Contribution Margin:**
\[ \text{Contribution Margin} = \text{Sales} - \text{Variable Costs} \]
\[ \text{Contribution Margin} = (P \times Q) - (V \times Q) \]
\[ \text{Contribution Margin} = (20 \times 5000) - (6 \times 5000) \]
\[ \text{Contribution Margin} = 1L - 30,000 \]
\[ \text{Contribution Margin} = ₹70,000 \]
2. **Calculate Operating Income:**
\[ \text{Operating Income} = \text{Sales} - \text{Variable Costs} - \text{Fixed Operating Costs} \]
\[ \text{Operating Income} = (P \times Q) - (V \times Q) - F \]
\[ \text{Operating Income} = (20 \times 5000) - (6 \times 5000) - 80,000 \]
\[ \text{Operating Income} = 1L - 30K - 80K \]
\[ \text{Operating Income} = -10,000 \]
(Negative operating income indicates a loss; however, for the purpose of operating leverage calculation, we proceed with the absolute values.)
3. **Calculate Operating Leverage:**
\[ \text{Operating Leverage} = \frac{\text{Contribution Margin}}{\text{Operating Income}} \]
\[ \text{Operating Leverage} = \frac{70K}{10K} \]
\[ \text{Operating Leverage} = 7 \]
### Interpretation:
An operating leverage of 7 indicates that for every 1% change in sales volume, the operating income will change by approximately 7%. Operating leverage amplifies the impact of changes in sales volume on operating income, which in this case is significant due to the relatively high fixed operating costs compared to variable costs. This sensitivity can lead to higher profitability in periods of increasing sales but can also magnify losses in periods of declining sales.
You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now
Click here to login now
Similar Resolved Queries
Unanswered Queries
- WRONG GSTR7 ENTRIES ACCEPTED ERRONEOUSLY
- Expert Help Required for TDS Refund 100000 Through TRACES – AY 2022–23
- IMPORT PURCHASE ENTRY PASSED IN BOOKS OF ACCOUNT
- FAST DS 26 Undisclosed Foreign Asset Disclosure Scheme 2026
- Regime change
- Tally: Imported bank entries do not show up in manual reconciliation
- Sales of goods of amount Rs97 lakhs to a party
- Confused About My Career After 12th — Cyber Security, AI or Finance? Need Guidance
- FAST-DS 2026 Under Tax Law - No recourse or support for person declaring via this scheme?
- Guidance Needed: Linking Multiple Form 26QB Payments and Responding to ITD Defaulter Notice
Trending Online Classes
-
DT & Audit (Exam Oriented Fastrack Batch) - For May 26 Exams and onwards Full English
CA Bhanwar Borana & CA Shubham Keswani
Subscribe to Pro
Join an elite circle of professionals
CAclubindia
