Question

# The ratio of cost-of-revenue to revenue (cost-of-revenue/revenue) provides a metric to assess how well Netflix is...

The ratio of cost-of-revenue to revenue (cost-of-revenue/revenue) provides a metric to assess how well Netflix is able to manage its gross profit percentage. An increase in rates charged to customers and/or a decrease in the cost of revenue will result in an increase in the gross profit percentage. If the ratio of “cost-of-revenue to revenue” reported for the year ended December 31, 2016 did not change over the three-year period from the number computed for the year ended December 31, 2016, how much in thousands of dollars would operating income for the year ended December 31, 2018 have increased or (decreased)?

Answer \$_____________________ indicate whether the change is an increase or decrease

 Consolidated Income Statement                     (in thousands) Dec. 31, 2018 Dec. 31, 2017 Dec. 31, 2016 Revenues \$ 15,794,341 \$ 11,692,713 \$ 8,830,669 Cost of revenues 9,967,538 8,033,000 6,257,462 Gross Margin 5,826,803 3,659,713 2,573,207 Expenses: Marketing expense 2,369,469 1,436,281 1,097,519 Technology and development expense 1,221,814 953,710 780,232 General and administrative expense 630,294 431,043 315,663 Total Expenses 4,221,577 2,821,034 2,193,414 Operating income 1,605,226 838,679 379,793 Interest expense 420,493 238,204 150,114 Other income (expense) 41,725 (115,154) 30,828 Income before income tax expense 1,226,458 485,321 260,507 Income tax expense 15,216 (73,608) 73,829 Net income \$ 1,211,242 \$ 558,929 \$ 186,678

 Given 2016 Revenues 8,830,669 Cost of revenues 6,257,462 cost-of-revenue to revenue 70.86% Gross Profit 2,573,207 Derived 2018 Revenues 15,794,341 Derived Cost of revenues @70.86% 11,191,959 Gross Profit 4,602,382 Reported Operating expenenses 4,221,577 Derived Operating income 380,805 A Reported Operating income 1,605,226 B Operating income for the year ended December 31, 2018 increased or (decreased) (1,224,421) A-B Answer (\$ 1,224,421). Negative indicates that the change is a decrease

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