12.

1 LEVERAGE
LEVERAGE:

CAPITAL
STRUCTURE:






OPERATING LEVERAGE
OPERATING
LEVERAGE:





DEGREE OF
OPERATING
LEVERAGE
(DOL):

















OPERATING LEVERAGE
OPERATING
LEVERAGE:




COMMERCE
COMPARATIVE INCOME STAEMENT
DETAILS AMOUNT



DOL








DCL
SALES [U X SP]--------------------------------
LESS: VARIABLE COST [U X VC]----------
$$$$
$$$$
%
SALES
CONTRIBUTION------------------------------
LESS: FIXED COST----------------------------
$$$$
$$$$

EBIT---------------------------------------------
LESS: INTEREST------------------------------
$$$$
$$$$
%
EBIT



DEL
EBT----------------------------------------------
LESS: TAX--------------------------------------
$$$$
$$$$

EAT----------------------------------------------
LESS: PD----------------------------------------
$$$$
$$$$

EACS---------------------------------------------
NS
$$$$
EPS =
EACS
NS

$$$$

%
EPS

OPERATING LEVERAGE
(CONSTANT ACTIVITY LEVEL)
DOL =
CONTRIBUTION
EBIT

DOL = DEGREE OF OPERATING
LEVEL
EBIT = EARNINGS BEFORE
INTEREST AND TAXES
DOL =
SALES-TVC
SALES-TVC-TFC

DOL = DEGREE OF OPERATING
LEVEL
TVC = TOTAL VARIABLE COST
TFC = TOTAL FIXED COST
DOL =
Q(SPu-VCu)
Q(SPu-VCu)-TFC

DOL = DEGREE OF OPERATING
LEVEL
Q = QUANTITY OF SALES UNIT
SPu = SELLING PRICE PER UNIT
VCu = VARIABLE COST PER UNIT
FC = TOTAL FIXED COST
DOL =
TFC+EBIT
EBIT

DOL = DEGREE OF OPERATING
LEVEL
TFC = TOTAL FIXED COST
EBIT = EARNINGS BEFORE
INTEREST AND TAXES
DOL =
SALES-TVC
EBIT

TVC = TOTAL VARIABLE COST
EBIT = EARNINGS BEFORE
INTEREST AND TAXES

CALCULATION OF CONTRIBUTION
CONTRIBUTION = SALES - TVC
TVC = TOTAL VARIABLE COST
CONTRIBUTION = Q(SPu VCu)
Q = QUANTITY OF SALES UNIT
SPu = SELLING PRICE PER UNIT
VCu = VARIABLE COST PER UNIT
CONTRIBUTION = EBIT + TFC
EBIT = EARNINGS BEFORE
INTEREST & TAX
TFC = TOTAL FIXED COST
CONTRIBUTION = QXSPu QXVCu
SPu = SELLING PRICE PER UNIT
VCu = VARIABLE COST PER UNIT
CALCULATION OF CONTRIBUTION
EBIT = SALES TVC - TFC
TVC = TOTAL VARIABLE COST
TFC = TOTAL FIXED COST
EBIT = QXSPu QXVCu TFC
SPu = SELLING PRICE PER
UNIT
VCu = VARIABLE COST PER
UNIT
TFC = TOTAL FIXED COST
EBIT = Q(SPu VCu) - TFC
Q = QUANTITY OF SALES UNIT
SPu = SELLING PRICE PER
UNIT
VCu = VARIABLE COST PER
UNIT
TFC = TOTAL FIXED COST
EBIT = CONTRIBUTION - TFC
TFC = TOTAL FIXED COST

OPERATING LEVERAGE
(CHANGE IN ACTIVITY LEVEL)
DOL =
% CHANGE IN EBIT
%CHANGE IN SALES
> 1

DOL =
% IN EBIT
% IN SALES
> 1


% CHANGE IN EBIT =
EBIT1-EBIT0
EBIT0
X 100
WHERE,
EBIT0 = BASE LEVEL EBIT
EBIT1 = CURRENT LEVEL EBIT
% CHANGE IN SALES =
SALES1-SALES0
SALES0
X 100
WHERE,
SALES0 = BASE LEVEL SALES
EBIT1 = CURRENT LEVEL SALES
DOL =
EBIT
Q
X
Q
EBIT




EFFECT ON LEVERAGE
DOL =
% CHANGE IN EBIT
%CHANGE IN SALES

CHANGE IN SALES causes CHANGE IN EBIT.
% CHANGE IN EBIT = DOL X % CHANGE IN SALES


OPERATING BREAK-EVEN POINT
(UNIT BREAK EVEN POINT)
BEP (U) =
TFC
SPu-VCu

TFC = TOTAL FIXED COST
VCu = VARIABLE COST PER
UNIT
SPu = SELLING PRICE PER UNIT
BEP (U) = BEP (TK.) UNIT SELLING PRICE

OPERATING BREAK-EVEN POINT
(DOLLAR BREAK EVEN POINT)
BEP (T) =
TFC X SPu
SPu - VCu

TFC = TOTAL FIXED COST
SP = SELLING PRICE PER UNIT
VC = VARIABLE COST PER UNIT
BEP (T) = BEP (UNIT) X SELLING PRICE
PER UNIT

BEP (T) =
TFC X TOTAL SALES
CONTRIBUTION

TFC = TOTAL FIXED COST

BEP (T) =
TFC
PV RATIO

TFC = TOTAL FIXED COST
PV RATIO =
SPu - VCu
SPu
X 100
or,
=
CONTRIBUTION
SALES
X 100

TARGET SALES
(UNIT)
TARGET SALES (U) =

=
TFC + TARGETED PROFIT
CM PER UNIT

TFC = TOTAL FIXED COST
SPu = SELLING PRICE PER UNIT
VCu = VARIABLE COST PER UNIT
=
TFC + TARGETED PROFIT
SPu - VCu

TARGET SALES (U) =
TFC + EBIT
SPu - VCu

TFC = TOTAL FIXED COST
SPu = SELLING PRICE PER UNIT
VCu = VARIABLE COST PER UNIT
EBIT = EARNINGS BEFORE INTEREST
AND TAX
TARGET SALES
(DOLLAR)
TARGET SALES (T) =
TFC
PV RATIO

TFC = TOTAL FIXED COST
PV RATIO =
SPu - VCu
SPu
X 100
or,
=
CONTRIBUTION
SALES
X 100
TARGET SALES (T) =


TFC+TARGET PROFIT
PV RATIO

TFC = FIXED COST
TARGET PROFIT = GIVEN IN QUESTION
PV RATIO =
SPu - VCu
SPu
X 100
or,
=
CONTRIBUTION
SALES
X 100
TARGET SALES (T) =
TFC + EBIT
PV RATIO

TFC = TOTAL FIXED COST
EBIT = EARNINGS BEFORE INTEREST & TAX
PV RATIO =
SPu - VCu
SPu
X 100
or,
=
CONTRIBUTION
SALES
X 100






FINANCIAL LEVERAGE
FINANCIAL
LEVERAGE:





DEGREE OF FINANCIAL
LEVERAGE:













COMMERCE
FINANCIAL LEVERAGE
(CONSTANT ACTIVITY LEVEL)
DFL =
EBIT
EBT

DFL = DEGREE OF FINANCIAL LEVERAGE
EBIT = EARNINGS BEFORE INTEREST AND TAXES
EBT = EARNINGS BEFORE TAXES
DFL =
EBIT
EBIT-INT

DFL = DEGREE OF FINANCIAL LEVERAGE
EBIT = EARNINGS BEFORE INTEREST AND TAXES
INT = INTEREST ON DEBT
DFL =
SALES-TVC-TFC
SALES-TVC-TFC-INT

DFL = DEGREE OF FINANCIAL LEVERAGE
TVC = TOTAL VARIABLE COST
TFC = TOTAL FIXED COST
INT = INTEREST ON DEBT
DFL =
Q(SPu-VCu)-TFC
Q(SPu-VCu)-TFC-INT

DFL = DEGREE OF FINANCIAL LEVERAGE
Q = QUANTITY OF SALES UNIT
SPu = PER UNIT SELLING PRICE
VCu = VARIABLE COST PER UNIT
TFC = TOTAL FIXED COST
INT = INTEREST ON DEBT
WHEN THERE IS PREFERENCE
SHARE:
DFL =

)

DFL = DEGREE OF FINANCIAL LEVERAGE
EBIT = EARNINGS BEFORE INTEREST AND TAXES
INT = INTEREST ON DEBT
BTPD =
PD
(1-Tr)

WHERE,
BTPD = BEFORE TAX PREFERENCE DIVIDEND
PD = DIVIDEND ON PREFERENCE SHARE
Tr = TAX RATE

CALCULATION OF EBIT
EBIT = SALES TVC - TFC
TVC = TOTAL VARIABLE COST
TFC = TOTAL FIXED COST
EBIT = Q(SPu VCu) - TFC
Q = QUANTITY OF SALES UNIT
SPu = SELLING PRICE PER UNIT
VCu = VARIABLE COST PER UNIT
TFC = TOTAL FIXED COST
EBIT = EBT + INT
EBT = EARNINGS BEFORE TAX
INT = INTEREST ON DEBT
CALCULATION OF EBT
EBT = SALES TVC TFC -INT
EBT = EARNINGS BEFORE TAX
TVC = TOTAL VARIABLE COST
TFC = TOTAL FIXED COST
INT = INTEREST ON DEBT
EBT = Q(SPu VCu) TFC INT
EBT = EARNINGS BEFORE TAX
Q = QUANTITY OF SALES
SPu = SALES PRICE PER UNIT
VCu = VARIABLE COST PER UNIT
TFC = TOTAL FIXED COST
INT = INTEREST ON DEBT
EBT = EBIT - INT
EBT = EARNINGS BEFORE TAX
EBIT = EARNINGS BEFORE INTEREST AND TAX
INT = INTEREST ON DEBT

FINANCIAL LEVERAGE
(CHANGE IN ACTIVITY LEVEL)
DFL =
% CHANGE IN EPS
%CHANGE IN EBIT
> 1

% CHANGE IN EPS =
EPS1-EPS0
EPS0
X 100
WHERE,
EPS0 = BASE LEVEL EPS
EPS1 = CURRENT LEVEL EPS
EPS = EARNINGS PER SHARE
% CHANGE IN EBIT =
EBIT1- EBIT 0
EBIT 0
X 100
WHERE,
EBIT0 = BASE LEVEL EBIT
EBIT1 = CURRENT LEVEL EBIT
EBIT = EARNINGS BEFORE INTEREST AND TAX
DFL =
EPS
EBIT
X
EBIT
EPS

= CHANGE IN.
EPS = EARNINGS PER SHARE
EBIT = EARNINGS BEFORE INTEREST AND TAX

FINANCIAL BREAK-EVEN POINT
BEP = INT +
PD
(1-Tr)

INT = INTEREST ON DEBT
PD = PREFERRED STOCK DIVIDEND
Tr = TAX RATE

EFFECT ON LEVERAGE
DFL =
% CHANGE IN EPS
%CHANGE IN EBIT

CHANGE IN EBIT causes CHANGE IN EPS
% CHANGE IN EPS = DFL X % CHANGE IN EBIT


TOTAL LEVERAGE
TOTAL
LEVERAGE:




DEGREE OF
TOTAL
LEVERAGE
[DTL]:









COMMERCE
TOTAL LEVERAGE
(FIXED ACTIVITY LEVEL)
DTL =
TSP-TVC
TSP-TVC-TFC-INT

=
TOTAL CONTRIBUTION
EBIT-INT

=
EBIT
EBIT-INT

WHERE,
DTL = DEGREE OF TOTAL LEVERAGE
TSP = TOTAL SALES PRICE
TVC = TOTAL VARIABLE COST
TFC = TOTAL FIXED COST
INT = INTEREST ON DEBT
EBIT = EARNINGS BEFORE INTEREST AND
TAX



TOTAL LEVERAGE
(CHANGE IN ACTIVITY LEVEL)
DTL =
% CHANGES IN SALES
% CHANGES IN EPS


% CHANGE IN SALES =
SALES1- SALES 0
SALES 0
X 100
WHERE,
SALES 0 = BASE LEVEL SALES
SALES 1 = CURRENT LEVEL SALES
% CHANGE IN EPS =
EPS1-EPS0
EPS0
X 100
WHERE,
EPS0 = BASE LEVEL EPS
EPS1 = CURRENT LEVEL
EPS = EARNINGS PER SHARE

COMMERCE
COMBINED LEVERAGE
(FIXED ACTIVITY LEVEL)
DCL =
CONTRIBUTION
EBT

WHERE,
DCL = DEGREE OF COMBINED LEVERAGE
EBT = EARNINGS BEFORE TAX
DCL = DOL X DFL
WHERE,
DCL = DEGREE OF COMBINED LEVERAGE
DOL = DEGREE OF OPERATING LEVERAGE
DFL = DEGREE OF FINANCIAL LEVERAGE
COMBINED LEVERAGE
(CHANGE IN ACTIVITY LEVEL)
DCL =
% CHANGES IN EPS
% CHANGES IN SALES

=
% EPS
% SALES


WHERE,
EPS = EARNINGS PER SHARE

EFFECT ON LEVERAGE
DCL =
% CHANGES IN EPS
% CHANGES IN SALES

CHANGE IN SALES causes CHANGE IN EPS
% CHANGE IN EPS = DCL X % CHANGE IN EPS



ADDITIONAL FORMULA
ADDITIONAL SALES = TARGET SALES PRESENT SALES
EAT = (EBIT-INT)(1-Tr)

EPS =
EACS
N.S

EPS = EARNINGS PER SHARE
EACS = EARNINGS AVAILABLE FOR COMMON
STOCK HOLDER
N.S = NUMBERS OF SHARE OUTSTANDING
EPS =
(EBIT-INT)(1-Tr)-PD
N.S

EPS = EARNINGS PER SHARE
EBIT = EARNINGS BEFORE INTEREST AND
TAXES
INT = INTEREST ON DEBT
Tr = TAX RATE
PD= PREFERRED DIVIDEND
NS = NUMBERS OF SHARE OUTSTANDING
ROI =
EBIT
TOTAL ASSET
X 100

ROE =
EPS
Po
X 100

ROE =
(EBIT-INT)(1-Tr)-PD
EQUITY CAPITAL


F. BEP = INT +
PD
(1-Tr)