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Q3.a. Operating leverage has a multiplier effect Explain this statement with hypothetical example. (5) b. Narrate few instances where a company can increase its operating
Q3.a. "Operating leverage has a multiplier effect" Explain this statement with hypothetical example. (5)
b. Narrate few instances where a company can increase its operating leverage? (5)
Q4. Observe the following two companies and their operating leverage
Particulars | Company A (Nu) | Company B (Nu) |
Sales | 2,50,000 | 3,15,000 |
V C | 1,02,000 | 1,05,000 |
Contribution (a) | 1,48,000 | 2,10,000 |
F C | 63,000 | 1,25,000 |
Net income (loss) (b) | 85,000 | 85,000 |
Operting leverage (a) / (b) | 1.74 | 2.47 |
- Both companies have the same net income of Nu 85,000, but company B has a higher degree of operating leverage. Why? (3)
- Let's assume that both company A and company B are anticipating a 10% increase in sales. Based on their respective degrees of operating leverage, what will their percentage change in net operating income? Explain with appropriate reasons (2)
- What happens to Companies' % change in Net Income when there is 20% decrease in sales? Give reasons (5)
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