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The following data applies to a manufacturing company:
Actual production and sales of a company is 3,000 units
Selling price is £30 per unit
Variable cost is £15 per unit
The company is considering two different capital structures G and U. The company also has two different production scenarios where fixed costs differ. In Scenario I fixed costs are £15,000 whereas in Scenario 2 the fixed costs are £20,000.
The capital structure is as follows:
Capital Structure G
Capital Structure U
Equity
£10,000
£ 15,000
Debt (Interest rate 20%)
£ 5,000
Total Capital
£20,000
£ 20,000
Calculate:
(a) Operating leverage
(b) Financial leverage
Ignore the effect of taxation.
