The question asks us what is the primary reason for the 36% increase in Food-for-all’s operating income.
The CFA solution (p294) argues that the depreciation expense has been reduced by $83 million due to the extension of the estimated useful life reevaluted in 2006.
I agree, but the two other options also seemed to explain an increase in the operating income.
a) growth of revenues: revenues between 2009 and 2010 increased by 26%
b) sales of receivables: it only accounts for $12 million but it stills contributes to it.
Thus, they three answers do contribute to the operating income increase, I understand that answer B (sales of receivable) affects it in smaller proportion, but how do we know that depreciation expense affects the operating income by more than the growth in revenue.
I know it’s probably a dumb one, but I seemed to be missing something. If you have a quick explanation, it would really help.
The compound growth rate at which revenues grew didn’t change, it was 25% both years, whereas the compound growth rate of operating income grew by 7% (36% - 29%). What is the primary driver of that additional 7% in operating income?
If you look at the exhibit and statements together, which the question calls on you to do, I think they’re really asking you what is the primary driver of the increase of operating income over prior years. The increase in revenues in both years was 25%, so why then didn’t operating income increase by the same rate in both years? There’s no additional growth in revenues and the gain on sale of receivables is smaller than the depreciation expense. With all that said, I think the question is poorly worded.
