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ABFM MODULE - B
Chapter 8: Financial and Operating Leverages (PART-III)
What we will study?
*How to calculate DOL?
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Example 1:
Calculate Degree of Operating Leverage when, a company
sells 1000 units of product X at Rs. 50 having variable cost of
Rs. 30 per unit and fixed cost of Rs. 15,000.
Solution:

Particulars Product X (Rs.)

Sales (50 x 1000 units) 50,000

Less: Variable Cost (30 x 1000 units) (30,000)

Contribution 20,000

Less: Fixed Cost (15,000)

Profit (EBIT) 5,000

𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏
Degree of Operating Leverage (DOL)= 𝑬𝑩𝑰𝑻
𝟐𝟎,𝟎𝟎𝟎
= = 4 times
𝟓,𝟎𝟎𝟎
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Example 2:
A Company ABC Ltd produces and sells 20,000 shirts. The
selling price per shirt is Rs. 500. Variable cost is Rs. 200 per
shirt and fixed operating cost is Rs. 40,00,000.
Calculate degree of operating leverage.
Solution:

Particulars Rs.
Sales Revenue (20,000 x 500) 1,00,00,000
Less: Variable Cost (20,000 x 200) 40,00,000
Contribution 60,00,000
Less: Fixed Cost 40,00,000
EBIT 20,00,000

𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏
Degree of Operating Leverage =
𝑬𝑩𝑰𝑻
𝟔𝟎,𝟎𝟎,𝟎𝟎𝟎
= 𝟐𝟎,𝟎𝟎,𝟎𝟎𝟎 = 3 times
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Illustration 3:
Calculate the degree of operating leverage for each of the four
Companies A Ltd, B Ltd, C Ltd and D Ltd from the following
price and cost data:
Company

A Ltd (Rs.) B Ltd (Rs.) C Ltd (Rs.) D Ltd (Rs.)

Sale price 20 32 50 70

Variable cost per unit 6 16 20 50

Fixed operating cost 60,000 40,000 1,00,000 Nil

Company
A Ltd B Ltd C Ltd D Ltd
Sale(units) 5,000 5,000 5,000 5,000
Seles revenue (Units x sale 1,00,000 1,00,000 2,50,000 3,50,000
price per unit)

Less: Variable cost (Unit x (30,000) (80,000) (1,00,000) (2,50,000)

variable cost per unit)

Contribution 70,000 80,000 1,50,000 1,00,000

Less: Fixed operation costs (60,000) (40,000) (1,00,000) Nil (0)

EBIT 10,000 40,000 50,000 1,00,000

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𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝟕𝟎,𝟎𝟎𝟎
DOL A Ltd = = = 7 times
𝑬𝑩𝑰𝑻 𝟏𝟎,𝟎𝟎𝟎

𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝟖𝟎,𝟎𝟎𝟎
DOL B Ltd = = 𝟒𝟎,𝟎𝟎𝟎 = 2 times
𝑬𝑩𝑰𝑻

𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝟏,𝟓𝟎,𝟎𝟎𝟎
DOL C Ltd = = = 3 times
𝑬𝑩𝑰𝑻 𝟓𝟎,𝟎𝟎𝟎

𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝟏,𝟎𝟎,𝟎𝟎𝟎
DOL D Ltd = = = 1 times
𝑬𝑩𝑰𝑻 𝟏,𝟎𝟎,𝟎𝟎𝟎

Break-Even Analysis:
Particulars Product A Product B
(Rs.) (Rs.)
Selling Price p.u. 40 20
Variable Cost p.u. 20 12
Fixed Cost 15,000 5,000

Now calculate DOL and Break-even point for Product A and

Product B?

Solution:
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Say we sell total 1000 units:
Particulars Product A Product B
(Rs.) (Rs.)
Selling Price p.u. 40 20
Total Selling cost 40*1000= 40,000 20*1000=20,000
Variable Cost p.u. 20 12
Total Variable Cost 20*1000= (20,000) 12*1000=(12,000)
Contribution 20,000 8,000
Fixed Cost (15,000) (5,000)
Profit (EBIT) 5000 3000
DOL 20000/5000 = 4 8000/3000 = 2.67

𝐅𝐢𝐱𝐞𝐝 𝐂𝐨𝐬𝐭
Break-even Point = 𝐂𝐨𝐧𝐭𝐫𝐢𝐛𝐮𝐭𝐢𝐨𝐧 𝐩𝐞𝐫 𝐮𝐧𝐢𝐭

𝟏𝟓𝟎𝟎𝟎
Break-even Point for A = = 750 units
𝟐𝟎
𝟓𝟎𝟎𝟎
Break-even Point for A = = 625 units
𝟖