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376 Corporate Finance BRILLIANT’S

will be more than the percentage change in H$m°ñQ g_mZ ahZo na {dH«$` _| hmoZo dmbo n[adV©Z H$s
sales. The occurrence is known as operating le- VwbZm _|, g§MmbZ Am` _| hmoZo dmbm n[adV©Z A{YH$ hmoVm
verage. The degree of operating leverage de- h¡Ÿ& `hr Am°naoqQ>J brdaoO H$s CËn{Îm H$m H$maU h¡Ÿ& Am°naoqQ>J
pends upon the amount of fixed elements in crdaoO H$s {S>J«r Bg ~mV na {Z^©a H$aVr h¡ {H$ bmJV
the cost structure. g§aMZm _| {\$ŠñS> H$m°ñQ H$s _mÌm {H$VZr h¡Ÿ&
The operating leverage may be defined as AV… \$_© H$s {\$ŠñS> H$m°ñQ H$s ghm`Vm go {dH«$`
the firm’s ability to use fixed operating costs to
_| n[adV©Z H$m \$_© H$s ã`mO d H$a Ho$ nyd© Am` (EBIT)
magnify the effect of changes in sales on its earn-
na n‹S>Zo dmbo à^mdm| H$mo OmZZo H$s \$_© H$s `mo½`Vm H$mo hr
ings before interest and taxes. A businessman
employs assets with fixed costs in the hope that Am°naoqQ>J brdaoO H$hm OmVm h¡Ÿ& H$moB© ^r ì`dgm`r `m
volume will produce revenues more than suf- H$ånZr ñWm`r ì``m| H$m ^ma Bgr Anojm go dhZ H$aVo h¢
ficient to cover all fixed and variable costs. In
{H$ {dH«$` go CËnÞ g§MmbZ bm^, ñWm`r bmJVm| H$s
other words, with fixed costs, the percentage
change in profit accompanying a change in VwbZm _| A{YH$ hmoJmŸ& Xygao eãXm| _|, {dH«$` _| n[adV©Z Ho$
volume is greater than the percentage change à{VeV H$s VwbZm _| bm^ _| n[adV©Z H$m à{VeV A{YH$
in volume. This occurrence is known as ‘Oper-
hmoZm hr "Am°naoqQ>J brdaoO' H$m gyMH$ h¡Ÿ&
ating Leverage’.
The operating leverage is calculated as Am°naoqQ>J brdaoO H$s JUZm H$m gyÌ {ZåZ h¡…
under:

Contributi on
Operating Leverage =
EBIT
Example: A firm sells its products for ` 50 CXmhaU… EH$ g§ñWm BgHo$ àmoS>³Q²>g ` 50 à{V
per unit, the variable operating costs ` 30 per BH$mB© na ~oMVr h¡, do[aE~b Am°naoqQ>J H$m°ñQ²>g ` 30 à{V
unit and fixed operating costs ` 15,000. Its cur- BH$mB© h¡ VWm {’$³ñS> Am°naoqQ>J H$m°ñQ> ` 15,000 h¡&
rent level of sales is 1,000 units. Determine the BgHo$ {dH«$¶ H$m dV©‘mZ ñVa 1,000 BH$mB¶m± h¡& EBIT
degree of operating leverage and impact of na Am°naoqQ>J brdaoO H$s ‘mÌm VWm {dH«$¶ ‘| n[adV©Z Ho$
change in sales on EBIT.
à^md H$m {ZYm©aU H$s{OE&
Solution:

Particulars `
Sales (1,000 × 50) 50,000
Less: Variable costs (1,000 × 30) 30,000
Contribution 20,000
Less: Fixed Costs 15,000
EBIT 5,000

Contributi on 20 , 000
Operating Leverage = =  4
EBIT , 5 000