Australia How does increasing sales volume increase the EBIT profit margin?

[Macha]

Hi

I was just wondering if someone could show me proof of how increasing sales volume increases EBIT profit margin?

Thanks!

 

[kirby]

If the proportion of ebit to revenue stays the same with an increase in volume then the percentage profit margin will also stay the same. So the only way for the percentage profit margin to increase is if the proportion of ebit to revenue increases.

 

[Macha]

If the proportion of ebit to revenue stays the same with an increase in volume then the percentage profit margin will also stay the same. So the only way for the percentage profit margin to increase is if the proportion of ebit to revenue increases.

An increase in sales volume will always increase EBIT profit margin apparently, I'm just trying to identify the mathematical reasoning why?

 

[kirby]

Well, no, but as you wish.
By the way, the formula you show is wrong. Correct is EBIT/Sales Revenue x 100%

 

[Macha]

What do you mean? In my lecture slides the lecturer has explicitly said that increasing sales volume will increase EBIT profit margin but not gross profit margin (how increasing sales volume does not increase gross profit margin makes sense mathematically. Also, the formula you just replied with is exactly the same as the formula I attached, ebit/sales revenue x 100 ...

 

[kirby]

Look at last character in my formula. See the % sign. That is what your formula lacks. You need the % sign to get a result in % terms, as the “n%” shows in your formula.

 

[Macha]

Look at last character in my formula. See the % sign. That is what your formula lacks

Multiplying by 100 is identical to multiplying by 100%…

 

[Macha]

Multiplying by 100 is identical to multiplying by 100%…

But my question remains unanswered, that is why increasing sales volume increases EBIT profit margin. Could you give an example maybe?

 

[kirby]

Multiplying by 100 is identical to multiplying by 100%…

So
if you get this offer:
You can have 1 AUD times 100 or
you can have 1 AUD times 100%
You would be willing to take the 1 AUD times 100%.
But that, as you know, is only 1 AUD.
So, 100 is not identical to 100%.

And I've attempted to answer your question already. Suggest you try your professor.
Good Luck!