January 10th, 2018
Impact of price reduction on investment return.
To get the same return on investment (ROI) with the same value of average total assets as in (a) then the net income in both cases (a) and (b) must be equal. This is because ROI is a ratio of net income to average total assets and for it to remain constant; both variables – net income and average total assets – must either remain unchanged or change in equal magnitudes. For instance, if the average total assets increase by 50 percent of their original value, the net income increase must also be in the magnitude of 50 percent for the ROI to remain the same.
For the ROI to remain unchanged after price reductions then the gain from the price reduction must offset losses thereof. Such would be achieved through increased sales volumes that generate additional revenue in excess of additional cost of selling more products. From the case in point, a 24 percentage point increase in revenue (64%-40% turnover) will be needed for the gains of the additional units sold to offset the loss generated by the price reduction. The assertion that the price reduction would necessitate a doubling of the sales volumes to generate an equal ROI is thus wrong. The sales manager would be required to increase his sales volume by 60 percent (24/40 x 100) to generate a ROI equal to the one that was being generated prior to the price reduction.