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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 

This question was previously asked in
UGC Paper 2: Commerce 22nd Dec 2018
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  1. 2.5
  2. 3
  3. 2
  4. 8

Answer (Detailed Solution Below)

Option 2 : 3
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Detailed Solution

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Formula: Combined Leverage = Contribution / Earnings Before Tax

Contribution = 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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