Question Bank - Accountancy

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Sales of a firm are Rs. 40 lacs; variable costs Rs. 10 lacs; fixed costs Rs. 15 lacs; interest Rs. 5 lacs. Combined leverage of the firm will be

A.
2.5
B.
3
C.
2
D.
8

Solution:

Formula: Combined Leverage = Contribution / Earnings Before TaxContribution = Sales - Variable Cost = 40 - 10 = Rs. 30 Lacs. Earnings Before Tax = Contribution - Fixed Cost - Interest = 30 - 15 - 5 = Rs. 10 Lacs. Thus, Combined Leverage = Contribution / Earnings Before Tax = 30 / 10 = 3.

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