In 2011, eBay had $11.6 billion in revenue and net income over $3.2 billion. eBay’s mission is to “provide a global trading platform where practically anyone can trade practically anything.” However, eBay has not always had profits in the billions.
Consider eBay’s situation during the early years. In the first quarter of 2001, eBay reported revenue of $154 million and operating expenses of $123 million, for an operating profit of $31 million.
In the first quarter of 2002, eBay reported that revenue had increased 59%, to $245 million. Assume that during both years, eBay’s fixed costs were $37 million and all other costs were variable costs.
1. Compute eBay’s operating income for the first quarter of 2002 assuming that variable costs were the same percentage of revenue in 2002 as in 2001. Compute the percentage increase in operating income between 2001 and 2002.
2. Explain how eBay managed to increase its income so much with only a 59% increase in revenue.