The correct answer is A. 2.5.
Combined leverage is a measure of how sensitive a company’s earnings per share (EPS) are to changes in sales. It is calculated by multiplying the firm’s operating leverage and financial leverage.
Operating leverage is a measure of how sensitive a company’s operating income is to changes in sales. It is calculated by dividing the firm’s contribution margin by its operating income.
Financial leverage is a measure of how sensitive a company’s earnings per share are to changes in its operating income. It is calculated by dividing the firm’s earnings before interest and taxes (EBIT) by its earnings per share.
In this case, the firm’s contribution margin is Rs. 25 lacs (40 lacs – 10 lacs – 15 lacs), its operating income is Rs. 10 lacs (40 lacs – 10 lacs – 15 lacs – 5 lacs), and its earnings per share is Rs. 2.5 (10 lacs / 4 lacs).
Therefore, the firm’s combined leverage is 2.5 (25 lacs / 10 lacs).
Option B is incorrect because it is the firm’s operating leverage.
Option C is incorrect because it is the firm’s financial leverage.
Option D is incorrect because it is the firm’s degree of operating leverage.