One simple observation that can be taken from the breakeven point is if outsourcing is necessary. This usually effects newer companies that are not very profitable or older companies that are not selling well. This is specifically used during recessions like between 2007 and 2009. Another observation that can be taken is how economies of scale will effect the contribution ratio. This is to say selling 100 items will make you $1,000 so therefor 10,000 will make you more than $100,000 as there will be production gains from moving product in bulk whether you receive a discount from manufacturers or savings in shipping by sending shipments that include more product all at once.
Put simply ROI is how much of your money you get back from an investment. An example would be what the ROI would be on installing solar panels to power the building in the parking lot and then seeing how much money would be saved compared to the companies current bills. If they have a lifetime gain of $50,000 and an installation cost of $40,000 they would have an ROI of 25%. The analysis of ROI is especially important when there is a large sum of money, if the financial commitment is longer than a year, if the funds are expected to create a cash flow, if the overall strategic direction of the company is effected, or if the prosperity of the company might change based on the investment. In these cases it is essential to analyze the ROI as if you have a plan to purchase a new warehouse and the ROI is 5 years but the company is currently in deep debt a shorter term ROI will be a better option. This can also be considered when it comes to tying up capital in an investment compared to another investment. If you end up putting too much into investments it might change the short term abilities of the company do to a loss in capital fluidity.
The payback is essentially the ROI compared to the investment itself rather than the fixed cost of the business and is used as a reflection of risk of the investment. The ROI hierarchy is exactly what it sounds like, it’s a list of potential investments that are racked and stacked based on the expected ROI. Comparing the two is a great way of adding risk into the calculation when looking at ROI. If I have an investment that is very lucrative, ie a high ROI, but it has a rather long payback time then it helps me decide if an investment is worth the risk. While it also helps keep you pick opportunity if you see in the ROI hierarchy there are investments that sit high on the ROI hierarchy and have a short payback period they are worth looking further into.
