Q.2 Royal industries a well established firm in plastics is considering the purchase of one of tow manufacturing companies. The financial manager of the company has developed the following information about two companies. Both companies have total assets of Rs. 15,00,000 Operating Statement Company X Company Y (Rs) (Rs) Sales reserves 30,00,000 30,00,000 Less cost of goods sold 22,50,000 22,50,000 Less selling expenses 2,40,000 2,40,000 Less administrative expenses 90,000 1,50,000 Less deprecation 1,20,000 90,000 EBIT 3,00,000 2,70,000 Cost break-ups Variable costs: Cost of good sold 9,00,000 18,00,000 Selling expenses 1,50,000 1,50,000 Total variable costs 19,50,000 10,50,000 i, Prepare operating statements for both the companies assuming that sales increase by 20%. The total fixed costs are likely to remain unchanged and the variable costs are a linear function of sales. ii. Calculate the degree of operating leverage. iii. If Royal industries wishes to buy a company which has a lower degree of business risk, which company would be purchased by it