So this is a question I got and was wondering how to answer it.
A company is doing $100 in revenue at a 20% EBITDA margin and cost structure of 50-50 fixed and variable. Revenue increases $10 and the EBITDA margin stays the same. What's the new EBITDA?
The new EBITDA is $26. Would anyone be able to help me why that is the case?
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The EBITDA margin doesn't stay the same. Maybe they misspoke.
For year 1, Revenue is $100 and EBITDA is $20, implying your total costs are $80. Your fixed costs are $40 and variable costs are $40 given they're split 50/50. Your variable costs are 40% of your sales ($40 / $100).
For year 2, Revenue is $110 and your fixed costs stay at $40 (since they're fixed). Your variable costs are actually $44 ($110 * 40%) since the variable cost margin stays the same (this is probably what they were referring to). Therefore your new EBITDA is $26, which is a 24% margin.
They misspoke and weren't clear. GP Margin is the same if ebitda is $26. They should have said GP margin stays the same.
Start:
Revenue is $100
Cogs: 50% x $80 = 40GP
$60Fixed costs: 50% x $80 = 40
EBITDA $20
Next year:
New revenue is $110
So GP = $66 (60% or revenue)
Fixed costs $40
EBITDA must be $26
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