A railroad theoretically presents a clear example of an industry subject to the law of increasing returns--that is to say, an industry in which the cost of operation grows less rapidly than the volume of business done. Each ton of freight added to the existing traffic costs relatively less to haul. From this it follows, obviously, that the net returns increase more than proportionately with the expansion of traffic. This may be demonstrated by a simple calculation. It has already been shown that only about two-thirds of the total expenditures of a railroad are applied to operation, the remaining third being devoted to capital account. Moreover, of these two-thirds of the total applied to operating outlay, only about one-half responds to any change in the tonnage, the other half being constant up to a certain point. Otherwise expressed, an increase of one per cent, in traffic and, therefore, of revenue, produces an increase in expense of only one-half of two-thirds of one per cent.[50] Two-thirds of the entire increment of revenue goes to profit. Carry this increase further and the effect is more striking. Suppose traffic to grow tenfold. The former outlay being $100 for a given volume of business, would be divided according to our rule as follows: one-third for fixed charges, one-third for constant operating outlay and one-third for variable expenses. With ten times as much traffic, only the last group of outgoes will expand. One thousand dollars revenue would therefore become available under the new conditions, to pay the same fixed charges as well as constant operating costs. The total outgo would thus become $33 plus $33 plus $330, or $396 in all. Almost two-thirds of the increment of revenue still remains as profit. It might well happen that such an expansion could not ensue without large increases in the capital and plant, as has already been noted; but up to that point this calculation would hold good. The following statement varying but slightly from our foregoing assumptions, illustrates the principle.[51] Let the distribution of expenditures for given conditions, producing $100 of revenue, be these, viz.: Operating expenses $ 67 Fixed charges $ 28 ---- $ 95 Profits for dividends $ 5 ---- $100 Now assume an increase of ten per cent. in the traffic and consequently in the revenue; but assume also that the average _extra_ cost per unit, of the new business, is only forty per cent. as much as for the preëxisting tonnage. Were the added cost of each ton mile as great as before, the operating expenses would rise by the full ten per cent. of $67. But on Webb's assumption, they will rise by only forty per cent. of ten per cent. The new account would then stand thus: