In July 2009, Apple Inc. announced that its revenues for the third quarter of its 2009 fiscal year rose 11.7 percent, causing its earnings to increase by 14.6 percent compared with the third quarter of 2008. Sales for this period were $8.34 billion. In July 2007, the company had announced that a 24 percent increase in revenue had produced a 73 percent increase in earnings, compared to the same quarter of the previous year. Sales for the second quarter of 2007 were $5.41 billion.
Required
a. What concept explains how Apple’s net income could rise by 14.6 percent when its revenue rose only 11.7 percent?
b. Does the concept identified in Requirement a result from fixed costs or variable costs?
c. Notice that in the third quarter of 2007, Apple’s percentage increase in earnings was over three times the percentage increase in revenue (73 ÷ 24 = 3.04). In the third quarter of 2009, however, Apple’s percentage increase in earnings was only about 1.25 times its increase in revenue (14.6 ÷ 11.7 = 1.25). Explain why the ratio of increase in earnings to increase in revenue was lower in 2009 than in 2007. Assume Apple’s general pricing policies and cost structure did not change.