The Wall Street Journal reported that to counter shrinking sales the previous summer, the cereal maker Quaker Oats had cut prices (Shulman and Miniter, 1998). In fact, according to the article, sales by the cereal maker had gone up since the price cut, with volume shipments increasing 9 percent. However, the increase in sales was accompanied by lower operating margins and declining profits.
Questions:
Why would operating margins decline as sales increase?
How could profits decline?