Question

What insight does ROI give into investment performance? Is it acceptable to lose profit on one product, if that product is vital to the sale of an extremely profitable product? Why?

As you think about these questions, also consider what other measures beside ROI might be help in analyzing solutions to business problems – or opportunities.

Answer 1

Lets consider the given question,

   Return on investment (ROI) is a measure used to determine the efficiency of an investment to generate profits. The ROI of an investment is compared with the required rate of return of the firm to decide upon whether an investment should be accepted or not. If the ROI of the investment is higher than the required rate of return the investment is considered profitable. Also, ROI of several investment proposals can be compared to decide which investment proposal would be the best.

In other words , a ROI is very critical to a success of a business since it gives an indicator of how much you have generated on your investment. Now, ROI gives an insight of how much return you are generating on your investment i.e. how much money you are generating out of every dollar invested.

While deciding upon whether to continue with a product of not, the overall profit to the firm is considered and not profits and losses from individual products. So if the firm is losing profit on one product that is vital to the sale of another extremely profitable product, it is acceptable to lose profit on the first product so that the sale of more profitable product could be continued. However, the profit from the profitable product must be enough to cover the loss from the product that is making losses.  

Is it many a times acceptable to lose profit on one product if it enhances the sale or profits of another product by an amount more than that is being lose on that product. Since if that product is dropped, then the sales or profit of other product will decline by an amount more than that was being saved by dropping that product line.

Other measures that can be useful are Net profit margin i.e. margins on every unit of sales and ROA i.e. return on assets i.e. how much money are the assets generating.