In its Form 10-K Skechers U.S.A., Inc., describes itself as follows:

We design and market Skechers-branded lifestyle footwear for men, women and children, and performance footwear for men and women under the Skechers GO brand name. . . . As of February 1, 2017, we owned and operated 117 concept stores, 163 factory outlet stores and 134 warehouse outlet stores in the United States, and 101 concept stores, 51 factory outlet stores, and 5 warehouse outlet stores internationally. The popularity of Skechers’ products has increased significantly in recent years. Sales increased from $1,560.3 million in 2012 to $3,563.3 million in 2017, for an increase of 128.4 percent. In the same period, operating income increased from $22.3 million to $370.5 million, for an increase of 1,561.4 percent. It should be noted that this growth was not the result of larger acquisitions of or mergers with other companies.

Required

Write a memorandum that explains how a 128 percent increase in sales could cause a 1,561 percent increase in profits. Your memo should address the following:

a. An identification of the accounting concept involved.

b. A discussion of how various major types of costs incurred by Skechers were likely affected by the increase in its sales.

c. The effect of the increase in sales on Skechers’ margin of safety.