During the past year the growth corporation increased its sales from $1,000,000 to $2,000,000 and its EBIT from $250,000 to $400,000.The result of this growth will be
A) a higher operating profit margin and higher net income.
B) a lower operating profit margin and lower net income.
C) a lower operating profit margin and higher net income.
D) a higher P/E ratio.

Question

Quizplus · Accepted Answer

The operating profit margin is calculated as EBIT/Sales. Initially, it was 250,000/1,000,000 = 25%. After the growth, it became 400,000/2,000,000 = 20%, indicating a lower operating profit margin. However, because EBIT increased from $250,000 to $400,000, net income also increased, assuming no changes in interest expenses and tax rates.

During the Past Year the Growth Corporation Increased Its Sales