The company is considering two different capital s

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.

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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%)

£10,000

£ 5,000

Total Capital

£20,000

£ 20,000

 

Calculate:

(a) Operating leverage

(b) Financial leverage

Ignore the effect of taxation.

 

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