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Answer – 1 & 2:
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COST SHEET OF DECCAN CEMENTS (in Rs. Cr.) |
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For the year ended March 31 |
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2021 |
2020 |
2019 |
2018 |
2017 |
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Particulars |
Amount ₹ |
Amount ₹ |
Amount ₹ |
Amount ₹ |
Amount ₹ |
|
Cost of material consumed |
68.20 |
54.58 |
61.23 |
52.23 |
48.62 |
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Prime Cost |
68.20 |
54.58 |
61.23 |
52.23 |
48.62 |
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Employee benefit expenses |
33.21 |
27.49 |
26.29 |
24.18 |
22.43 |
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Other expenses |
475.02 |
399.91 |
466.37 |
401.72 |
328.82 |
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Factory cost |
576.43 |
481.98 |
553.89 |
478.13 |
399.87 |
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Finance cost |
7.43 |
6.78 |
7.73 |
5.66 |
6.84 |
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Depreciation and amortisation expenses |
23.17 |
20.91 |
22.31 |
22.69 |
21.72 |
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Cost of production |
607.03 |
509.67 |
583.93 |
506.48 |
428.43 |
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Change in inventories |
5.68 |
-4.94 |
2.31 |
6.88 |
-3.35 |
|
Cost of sales |
612.71 |
504.73 |
586.24 |
513.36 |
425.08 |
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Profit |
155.35 |
60.16 |
75.05 |
60.84 |
73.58 |
|
Sales |
768.06 |
564.89 |
661.29 |
574.20 |
498.66 |
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Variable costs |
576.43 |
481.98 |
553.89 |
478.13 |
399.87 |
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Contribution |
191.63 |
82.91 |
107.40 |
96.07 |
98.79 |
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Fixed costs |
23.17 |
20.91 |
22.31 |
22.69 |
21.72 |
|
EBIT |
168.46 |
62.00 |
85.09 |
73.38 |
77.07 |
|
Finance cost |
7.43 |
6.78 |
7.73 |
5.66 |
6.84 |
|
EBT |
161.03 |
55.22 |
77.36 |
67.72 |
70.23 |
|
Operating leverage (Contribution / EBIT) |
1.138 |
1.337 |
1.262 |
1.309 |
1.282 |
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Financial leverage (EBIT / EBT) |
1.046 |
1.123 |
1.100 |
1.084 |
1.097 |
|
Combined leverage (Contribution / EBT) |
1.190 |
1.501 |
1.388 |
1.419 |
1.407 |
Answer – 3:
Operating Leverage is used for the measurement of the ratio of the structure of cost of a company which is inclusive of fixed costs rather than variable costs (Operating Leverage Formula | Example | Calculation | Analysis, 2022). The calculations in the above table show that operating leverage has been the lowest in the year 2021 and the highest in 2020 which means each rupee spent by the company is capable of generating lower profits in the year 2021 as compared to previous years.
Financial leverage is used for the measurement of the sensitivity of the EPS of a company in relation to its EBIT (Jan, 2018). The calculations in the above table show that financial leverage has been the lowest in the year 2019 and the highest in 2020 which means the financial risk of the company has decreased in the year 2021 as compared to 2020.
The total risk of a company in relation to operating leverage and financial leverage, and the effect of such risk on the EPS, is represented by combined leverage (Tamplin, 2021). The calculations in the above table show that financial leverage has been the lowest in the year 2019 and the highest in 2020 which means the total risk for the company has been reduced in the year 2021 as lower combined leverage is better for a company.
Answer – 4:
The operating leverage has been the lowest in the year 2021 which means the company should lower the variable costs in order to generate higher contribution and increase the financial performance of the company.
References
Jan, O., 2018. Degree of Financial Leverage. [online] Xplaind.com. Available at: [Accessed 22 February 2022].
My Accounting Course. 2022. Operating Leverage Formula | Example | Calculation | Analysis. [online] Available at: [Accessed 22 February 2022].
Tamplin, T., 2021. What Is Combined Leverage? | Definition, Formula and Examples. [online] Finance Strategists. Available at: [Accessed 22 February 2022]
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