Correlation with revenue

Hi there,

This is indeed an interesting, very specific question, so I am happy to provide my perspective on it:

• You are right that it is a ratio yet you seem to mix up the implications.
• Consider revenues being 100 (of any value) and production costs being 50 (of any value). When the ratio is 0.75, this would mean that if revenues increase by 100%, production costs increase increase by 75%, i.e. revenues will be 200 (of any value) and production costs will be 87.5 (of any value).

In case you want a more detailed discussion on how to best approach the whole case study, please feel free to contact me directly.

I hope this helps,

Hagen

I've run through your question again, and I think I found what is your real issue there.

As it is written, if costs correlate 75% with revenues, it then means that 75% of the costs are variable to revenue (i.e., a change in total cost is explained by the change in revenue), and the other 25% are fixed.

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This was my initial answer and should be helpful to understand the comment above:

Correlation means there is a non linear association, and measures the strength of the relationship between two variables. Therefore the second option is the correct one.

The R-squared indicates the percentage of variation explained by your regression line, so it is a measure of correlation (correlation is actually R, but this is a technicality).

The first option would be a proportion within a linear association.

Unless you give us the full question on context - it is difficult to say. It could be either of the options:

Production cost = 0.75 * Revenue

This is a mathematical relationship

OR

R-squared = 0.75

This is an empirical outcome of data provided - it does not govern how to calculate production cost - it merely tells you loosely, the relation between the two quantities

Both of these are different.

Hi there,

It would be better if we saw the exact prompt/text, but what this seems to say is that, for every $1 of revenue, we have 75 cents of costs. Therefore we make 25 cents in profit for every dollar sold, or, put another way, we have a 25% profit margin.

This has nothing to do with R-Squared. R-Squared is a measure of accuracy in regressions which has nothing to do with casing (so don't worry about it!)

Hi!

From the context you provided, it looks like they're giving you a correlation coefficient.

Hope this helps.

Best,

Anto