Question

Return on Investment: Margin vs Volume

• Example 1: 12% = 6% x 2
• Example 2: 12% = 5% x 2.4
• Example 3: 12% = 1% x 12
• Example 4: 12% = 12% x 1

Why is it important for you to know whether your firm looks like Examples 1 and 2 or like Example 3 or Example 4? What are the riskier examples? Why?

Answer 1

Answer-

The analysis of the Return on Investment

	Return on Investment	Margin	Volume
Example 1	12 %	6 %	2
Example 2	12 %	5 %	2.4
Example 3	12 %	1 %	12
Example 4	12 %	12 %	1

The above table shows that

It's better to have Example 1 and Example 2 type of firm rather than Example 3 and Example 4 because the margin and volume are not extreme value but are proportional and are consistent and will not be volatile.

Example 1 and Example 2 have margin 6 % and 5 % and Volumes of 2 and 2.4 respectively whereas Example 3 and Example 4 has margin of 1 % and 12 % and volume of 12 and 1 respectively.

The Examples 3 & 4 are riskier scenarios.
The Example 3 has margin of 1 % which is very less compared to high volume of 12 whereas in Example 4 Margin is 12 % which is very high with respect to volume of 1.

Therefore Examples1 & 2 are less riskier and are preferable over the Examples 3 & 4, because of prorpotinally divided margins and volumes.