Analysis of Manufacturing Organisation.doc

Analysis of Manufacturing Organisation.doc - FINANCIAL...

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Unformatted text preview: FINANCIAL MANAGEMENT I Take Home Assignment Submission V Submitted By: Roll No. B11076 DOL, DFL, DTL of Elecon Engineering Company Degree of Operating leverage, financial leverage and total leverage Degree of operating Leverage (DOL) is the measure of the ability of the firm to use fixed operating cost to magnify the effect of changes in sales on its operating profit. 1 DOL = ( Percenatge change in Operating Profit/ Percentage change in sales volume) Percentage change in Operating Profit = [ Q(S-V)] / [Q(S-V)-F] Percentage change in sales = QXS/QXS = Q/Q Hence, DOL= Q(S-V) / Q(S-V)-F Degree of financial leverage (DFL) is measure of the ability of the firm to use financial charges to magnify the effect of change of EBIT on firms EPS. 1 DFL= Percentage change in EPS/ Percentage change in EBIT = EBIT/[ EBT- Dp/(1-t)] Degree of total leverage is the combined effect of DOL and DFL. It is the measure of both financial and operational leverage of the firm. DTL= Percentage change in EBT/ Percentage change in Sales volume =[ Q(S-V) Fin Charges] / [Q(S-V)-F] Classification of Expense Heads : Methodology. In order to perform DOL, DFL, DTL estimation I have probed the structure of expenses as provided in the schedules of the profit and loss account and distributed them under 3 heads. Fixed Cost Head Variable Cost Head Semi Variable Cost Head For this I have considered 3 years data points (2008-09, 2009-10, 2010-11) and computed each expense head as a percentage of sales. The classification into Fixed, Variable and Semi variable heads are based on the trend of the each expense head over these 3 years time period. In places where the trend is not available I have adopted classical approach of cost accounting for classification. The composition of semi variable cost are fixed and variable in nature. So the equation for total semi variable cost for the year 2011 can be expressed as SVC 2011 = FC + Variable Cost as percentage of Sales x Sales 2011 Solving the FC and Semi variable cost from simultaneous equations constructed with two years data I estimated the composition of semi variable cost.--------- 1. Bhabatosh Banerjee 8E 2010 ELECON ENGINEERING COMPANY LIMITED 2 Expenditure Charges 2010-11 2009-10 2008-09 2010-11 2009-10 2008-09 Nature of Cost Raw Material Consumed 68413.72 57859.71 58655.28 61.69379 59.52738 74.28356 Semi Variable Stores, Tools ad Spares Consumed 1788.65 1365.39 2196.81 1.61296 1.404744 2.782134 Semi Variables Sub Contracts 6379.61 8493.07 11337.66 5.752973 8.737863 14.3585 Variable Erection and other charges 1540.55 828.55 416.2 1.38923 0.852431 0.527094 Variable Other Manufacturing Expenses 1013.02 735.94 1041.62 0.913516 0.757152 1.319152 Semi Variables Technical Know How & Design 202.56 94.26 100.11 0.182664 0.096977 0.126784 Semi Variables Employee Renumeration and Benefits Salaries & Wages 4988.66 3779.46 3735.4 4.498649 3.888394 4.730671 Fixed Contribution to Provident Fund 221.94 185.33 154.25 0.20014 0.1906720....
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