VARSHA’S CA IN PROGRESS

TEST SERIES FOR JANUARY 2025 EXAMS

VARSHA’S CA IN PROCESS
TEST SERIES FOR JANUARY 2025 EXAMS

CA INTERMEDIATE

SOLUTION
FINANCIAL MANAGEMENT
TEST NO: 1 Duration: 60 mins

SYLLABUS : LEVERAGE Marks: 30

Instructions:

All the questions are compulsory. 60 MINS INCLUDES 5 MINS READING TIME.

Properly mention test number and page number on your answer sheet, try to upload sheets in

arranged manner.

In case of multiple choice questions, mention option number only Working notes are compulsory

wherever required in support of your solution

Do not copy any solution from any material. Attempt as much as you know to fairly judge your

performance.

It is recommended to scan and upload the copies as PDFs.

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 VARSHA’S CA IN PROGRESS
TEST SERIES FOR JANUARY 2025 EXAMS

SOLUTION1:

Statement Showing OL, FL and CL

Situation I Situation II
Particulars
Plan A Plan B Plan A Plan B
Sales (3,000 × ₹30) 90,000 90,000 90,000 90,000
Less: Variable cost 45,000 45,000 45,000 45,000
Contribution 45,000 45,000 45,000 45,000
Less: Fixed Cost 15,000 15,000 20,000 20,000
EBIT 30,000 30,000 25,000 25,000
Less: Interest 2,000 1,000 2,000 1,000
EBT 28,000 29,000 23,000 24,000
OL (Contribution ÷ EBIT) 1.5 1.5 1.8 1.8
FL (EBIT ÷ EBT) 1.07 1.03 1.09 1.04
CL (Contribution ÷ EBT) 1.61 1.55 1.96 1.88

(5 MARKS)

SOLUTION 2:

Answer
Statement Showing Operating Leverage

Particulars Product X
Sale 50,000
Less: Variable Cost per unit 30,000
Contribution 20,000
Less: Fixed cost 15,000
Earning before interest and tax 5,000
Break-even point (Fixed Cost ÷ Contribution per unit) or (15,000 ÷ 20) 750 units
Margin of Safety (1,000 units – 750 units) 250 units
Margin of Safety to Sales (250 units ÷ 1,000 units) 0.25

Operating Leverage (1 ÷ MOS to sales ratio) or (1 ÷ 0.25) 4 times

(5 MARKS)

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 VARSHA’S CA IN PROGRESS
TEST SERIES FOR JANUARY 2025 EXAMS

SOLUTION 3:

Income Statement
Particulars Company P Company Q
Sales 40,00,000 18,00,000
Less: Variable cost 30,00,000 12,00,000
Contribution 10,00,000 6,00,000
Less: Fixed cost 8,00,000 4,50,000
Profit before interest and tax 2,00,000 1,50,000
Less: Interest 1,50,000 1,00,000
Profit before tax 50,000 50,000
Less: Tax @ 45% 22,500 22,500
Profit after tax 27,500 27,500

Working Notes:

(a) Margin of Safety:

For Company P = 0.20
For Company Q = 0.20 × 1.25 = 0.25

(b) Interest Expenses:

For Company P = ₹1,50,000
For Company Q = ₹1,50,000 - 1/3 of ₹1,50,000 = ₹1,00,000

(c) Financial Leverage:

For Company P = 4
For Company Q = 4 × 75% = 3

(d) EBIT:
For Company A

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 VARSHA’S CA IN PROGRESS
TEST SERIES FOR JANUARY 2025 EXAMS

Financial Leverage = EBIT/(EBIT- Interest)

4 = EBIT/(EBIT- ₹1,50,000)
4 EBIT – ₹6,00,000 = EBIT
3 EBIT = ₹6,00,000
EBIT = ₹2,00,000

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 VARSHA’S CA IN PROGRESS
TEST SERIES FOR JANUARY 2025 EXAMS

FOR COMPANY B
Financial Leverage = EBIT/(EBIT - Interest)
3 = EBIT/(EBIT – ₹1,00,000)
3 EBIT – ₹3,00,000 = EBIT
2 EBIT = ₹3,00,000
EBIT = ₹1,50,000

(e) Contribution:
For Company A

Operating Leverage = 1/Margin of Safety = 1/0.20 = 5

Operating Leverage = Contribution/EBIT
5 = Contribution/₹2,00,000
Contribution = ₹10,00,000

For Company B
Operating Leverage = 1/Margin of Safety = 1/0.25 = 4
Operating Leverage = Contribution/EBIT
4 = Contribution/₹1,50,000
Contribution = ₹6,00,000

(f) Sales:
For Company A

Profit Volume Ratio = 25%

Profit Volume Ratio = (Contribution/Sales) × 100
25% = ₹10,00,000/Sales
Sales = ₹10,00,000/25%
Sales = ₹40,00,000

For Company B
Profit Volume Ratio = 33.33%
Therefore, Sales = ₹6,00,000/33.33%
Sales = ₹18,00,000

(10 MARKS)
SOLUTION 4:
Income Statement

Particulars ₹
Sales 75,00,000
Less: Variable cost @ of 56% of sales 42,00,000
Contribution 33,00,000
Less: Fixed costs 6,00,000

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 VARSHA’S CA IN PROGRESS
TEST SERIES FOR JANUARY 2025 EXAMS

EBIT 27,00,000
Less: Interest @ 9% of 45,00,000 4,05,000
EBT 22,95,000

(i) ROI = EBIT 27,00,000 ×100 = 27%

×100 =
Capital Employed 45,00,000  55,00,000

(ii) ROI is 27% and Interest on debt is 9%, hence, it has a favourable financial leverage.

(iii) Capital Turnover = 75,00,000 = 0.75

Net Sales
=
Capital 1,00,00,000

Firm has very low capital turnover as compared to industry average of 3.

(iv) Calculation of Operating, Financial and Combined leverages:

Contributi on 33,00,000
Operating Leverage = = = 1.222
EBIT 27,00,000

Financial Leverage = EBIT = 27,00,000 = 1.176

EBT 22,95,000

Combined Leverage = OL × FL = 1.222 × 1.176 = 1.437

(v) Operating leverage is 1.22. So if sales is increased by 10% then EBIT will be increased by 1.222
× 10 i.e. 12.22% (approx)

(vi) EBT = Sales – Variable cost – Fixed cost – Interest

Nil = Sales – 56% sales – 6,00,000 – 4,05,000
44% of sales = 10,05,000
Sales = 22,84,091

Hence at ₹22,84,091 sales level EBT of the firm will be equal to Zero.

(vii) Financial leverage is 1.176. So, if EBIT increases by 20% then EBT will increase by 1.18 × 20% =
23.52% (approx)

(10 MARKS)

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 VARSHA’S CA IN PROGRESS
TEST SERIES FOR JANUARY 2025 EXAMS

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