Homework Answers
Hi There,
Here is my answer to the given question.
A. DEGREE OF OPERATING LEVERAGE
Degree of operating leverage = (Sales - Variable cost) / (Sales - Variable cost - Fixed cost)
| Particulars | GBP (Millions) |
| Sales | 279.75 |
| Variable costs (VC) | 150.00 |
| Fixed cost (FC) | 65.00 |
| Sales-VC | 129.75 |
| Sales-VC-FC | 64.75 |
| Degree of operating leverage | 2.00 |
B. EBIT IF COMPANY SALES VOLUME INCREASES BY 25%
EBIT = Sales - Variable cost - Fixed cost
| Particulars | Calculation | GBP (Millions) |
| Sales | 15,000,000*125%*18.65 | 349.69 |
| Contribution Margin | 162.19 | |
| Variable cost | 15,000,000*125%*10 | 187.50 |
| Fixed cost | Given | 65.00 |
| Earnings before interest & Tax (EBIT) | 97.19 |
C. DEGREE OF FINANCIAL LEVERAGE
Degree of financial leverage = EBIT / EBIT - Interest expense
= 64.75 / 64.75 - 3.50
= 1.057
D. EPS IF EBIT INCREASES BY 10%
| Particulars | GBP (Millions) |
| Sales | 279.75 |
| Variable costs (VC) | 150.00 |
| Fixed cost (FC) | 65.00 |
| EBIT- Actual | 64.75 |
| EBIT - increased by 10 % | 71.23 |
| Interest | 3.50 |
| Earnings before tax (EBT) | 67.73 |
| Tax @20% | 13.55 |
| Earnings after tax | 54.18 |
| No of shares (Millions) | 5 |
| EPS | 10.84 |
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