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10% fall in sales sales 10 9 variable cost (2) (1.8) fixed cost (5) (5) operating profit 3 2.2 interest (2) (2) PBIT 1 0.2 in the context of above information explain that sentence”the additional 53.33% variation over and above the change in operating earning is due to the use of debt finance.
I do not like being asked questions to ‘test my understanding’. I understand Paper F9 perfectly well and I am here to help – not to have my understanding tested!
Also, please do not just tell me to explain something. It would be nice if you could at least say please 🙂
The operating profit has fallen by 0.8 from 3 – a fall of 26.66% (0.8 / 3).
However the profit available for shareholders has fallen from 1 to 0.2 – a fall of 80% (0.8/1).
The reason for the increase in the fall of 53.33% (80 – 26.66) is because of the interest payable, which is due to the use of debt finance. i.e the financial gearing.
(The fall in operating profit of 26.66% is higher than the fall in sales of 10%. This is because of the operational gearing.)
I suggest that you watch my free lecture on gearing.
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