{"id":50748,"date":"2024-04-15T23:14:47","date_gmt":"2024-04-15T23:14:47","guid":{"rendered":"https:\/\/exam.pscnotes.com\/mcq\/?p=50748"},"modified":"2024-04-15T23:14:47","modified_gmt":"2024-04-15T23:14:47","slug":"operating-leverage-and-financial-leverage-of-a-firm-are-3-and-2-respectively-if-sales-increase-by-6-then-earnings-before-tax-will-rise-by","status":"publish","type":"post","link":"https:\/\/exam.pscnotes.com\/mcq\/operating-leverage-and-financial-leverage-of-a-firm-are-3-and-2-respectively-if-sales-increase-by-6-then-earnings-before-tax-will-rise-by\/","title":{"rendered":"Operating Leverage and Financial Leverage of a firm are 3 and 2, respectively. If sales increase by 6%, then earnings before tax will rise by:"},"content":{"rendered":"<p>\r\n    <!-- Check if it's an AMP page -->\r\n            <!-- Non-AMP version -->\r\n        <div class=\"mcq-container\" data-quiz-id=\"quizState_6a976add20ce4\">\r\n                                            <div class=\"option\" data-option-key=\"option1\" data-is-correct=\"true\">\r\n                    18%                <\/div>\r\n                                            <div class=\"option\" data-option-key=\"option2\" data-is-correct=\"false\">\r\n                    12%                <\/div>\r\n                                            <div class=\"option\" data-option-key=\"option3\" data-is-correct=\"false\">\r\n                    36%                <\/div>\r\n                                            <div class=\"option\" data-option-key=\"option4\" data-is-correct=\"false\">\r\n                    30%                <\/div>\r\n                            \r\n            <!-- Feedback messages for non-AMP -->\r\n            <div class=\"feedback\" data-feedback=\"wrong\">Answer is Right!<\/div>\r\n            <div class=\"feedback\" data-feedback=\"right\">Answer is Wrong!<\/div>\r\n        <\/div>\r\n\r\n        <script>\r\n        document.addEventListener('DOMContentLoaded', function () {\r\n            var containers = document.querySelectorAll('.mcq-container');\r\n\r\n            containers.forEach(function(container) {\r\n                var options = container.querySelectorAll('.option');\r\n                var feedbackSelect = container.querySelector('[data-feedback=\"select\"]');\r\n                var feedbackWrong = container.querySelector('[data-feedback=\"wrong\"]');\r\n                var feedbackRight = container.querySelector('[data-feedback=\"right\"]');\r\n\r\n                options.forEach(function(option) {\r\n                    option.addEventListener('click', function() {\r\n                        var selectedOption = option.getAttribute('data-option-key');\r\n                        var isCorrect = option.getAttribute('data-is-correct') === 'true';\r\n\r\n                        \/\/ Remove previous selections\r\n                        options.forEach(function(opt) {\r\n                            opt.classList.remove('correct', 'incorrect');\r\n                        });\r\n\r\n                        \/\/ Add the correct\/incorrect class\r\n                        if (isCorrect) {\r\n                            option.classList.add('correct');\r\n                            feedbackRight.hidden = false;\r\n                            feedbackWrong.hidden = true;\r\n                        } else {\r\n                            option.classList.add('incorrect');\r\n                            feedbackRight.hidden = true;\r\n                            feedbackWrong.hidden = false;\r\n                        }\r\n\r\n                        \/\/ Hide select feedback\r\n                        feedbackSelect.hidden = true;\r\n                    });\r\n                });\r\n            });\r\n        });\r\n        <\/script>\r\n    \r\n    <!--more--><\/p>\n<p>The correct answer is: A. 18%<\/p>\n<p>Operating leverage is a measure of how sensitive a company&#8217;s operating income is to changes in sales. It is calculated by dividing the contribution margin by the operating income. Financial leverage is a measure of how sensitive a company&#8217;s earnings before interest and taxes (EBIT) is to changes in sales. It is calculated by dividing the EBIT by the earnings before tax (EBT).<\/p>\n<p>If a company has an operating leverage of 3 and a financial leverage of 2, then a 6% increase in sales will result in a 18% increase in EBIT. This is because the company&#8217;s operating income will increase by 6%, and its financial income will increase by 12%. The total increase in EBIT will be 18%.<\/p>\n<p>Here is a more detailed explanation of each option:<\/p>\n<ul>\n<li>Option A: 18%. This is the correct answer. As explained above, a 6% increase in sales will result in a 18% increase in EBIT.<\/li>\n<li>Option B: 12%. This is the percentage increase in operating income. However, operating income is only one component of EBIT. The other component is financial income. In this case, financial income is 2 times operating income, so the total increase in EBIT will be 18%.<\/li>\n<li>Option C: 36%. This is the percentage increase in operating income multiplied by the financial leverage. However, this does not take into account the fact that EBIT is also affected by changes in fixed costs. In this case, the fixed costs are not changing, so the total increase in EBIT <div class=\"youtube-subscribe-container\">\r\n        <a href=\"https:\/\/www.youtube.com\/channel\/UCNHT8lW-JmLC68rjBfZhdkg?sub_confirmation=1\" target=\"_blank\" class=\"youtube-subscribe-button\">\r\n            <span class=\"youtube-icon\">\r\n                <svg xmlns=\"http:\/\/www.w3.org\/2000\/svg\" viewBox=\"0 0 576 512\">\r\n                    <path d=\"M549.7 124.1c-6.3-23.7-24.8-42.3-48.3-48.6C458.8 64 288 64 288 64S117.2 64 74.6 75.5c-23.5 6.3-42 24.9-48.3 48.6-11.4 42.9-11.4 132.3-11.4 132.3s0 89.4 11.4 132.3c6.3 23.7 24.8 41.5 48.3 47.8C117.2 448 288 448 288 448s170.8 0 213.4-11.5c23.5-6.3 42-24.2 48.3-47.8 11.4-42.9 11.4-132.3 11.4-132.3s0-89.4-11.4-132.3zm-317.5 213.5V175.2l142.7 81.2-142.7 81.2z\"\/>\r\n                <\/svg>\r\n            <\/span>\r\n            Subscribe on YouTube\r\n        <\/a>\r\n    <\/div> will be 18%.<\/li>\n<li>Option D: 30%. This is the percentage increase in sales multiplied by <div class=\"telegram-channel-container\">\r\n        <a href=\"https:\/\/t.me\/pscnotes2025\" target=\"_blank\" class=\"telegram-channel-button\">\r\n            <span class=\"telegram-icon\">\r\n                <svg xmlns=\"http:\/\/www.w3.org\/2000\/svg\" viewBox=\"0 0 496 512\">\r\n                    <path fill=\"white\" d=\"M248,8C111,8,0,119,0,256s111,248,248,248s248-111,248-248S385,8,248,8z M362,177L320,367c-3,14-10,18-20,14l-56-41l-27,26 c-3,3-5,5-10,5l4-63L323,196c5-5-1-7-8-3l-98,62l-42-13c-9-3-10-9,2-14l162-63C351,160,365,164,362,177z\"\/>\r\n                <\/svg>\r\n            <\/span>\r\n            Join Our Telegram Channel\r\n        <\/a>\r\n    <\/div> the operating leverage. However, this does not take into account the fact that EBIT is also affected by changes in financial leverage. In this case, the financial leverage is 2, so the total increase in EBIT will be 18%.<\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>Subscribe on YouTube<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[85],"tags":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v22.2 (Yoast SEO v23.3) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Operating Leverage and Financial Leverage of a firm are 3 and 2, respectively. 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