Approach to increasing margin calculation

The answer is ~91.8%, corresponding to ~1.8% margin increase.

Please consider the following, where r is revenue, c is cost, and x is the new margin:

• Current: (r - c) / r = 90% → (100 - 10) / 100 = 90%
• Proposed: (r*1.1 - c*0.9) / (r*1.1) = x → (100*1.1 - 10*0.9) / (100*1.1) = (110-9) / (110) = 91.8%

Hope this helps!

Hi there,

The best way to solve this kind of problem is to use numerical examples:

Let's assume the following:

• Initial Revenue = 100
• Initial Cost = 10
• Initial Margin = (Revenue - Cost) / Revenue = (100-10)/100 = 90%

This is your current state now the company wants to increase revenues by 10% and reduce costs by 10% so your new values would be the following:

• New Revenue = Initial Revenue * 1.1 (or * 110% to show increase of 10%) = 100 *1.1 = 110
• New Cost = Initial Cost * 0.9  (or 90% to show decrease of 10%) = 10 * 0.9 = 9
• New Margin = (New Revenue - New Cost) / New Revenue = (110 - 9)/110 = ~92% or you can integrate the initial values but since it was already calculated no need to complicate the math 

If the firm manages to increase revenues by 10% and decrease costs by 10% it will have an incremental 2% in the margin with a net margin of 92%  

Hope this was helpful!

Hi there,

Hani and Mortiz are exactly right!

Make sure that you fully understand the major math concepts (Margin, Markup, ROI, Breakeven, NPV,  etc.) and how to apply them in multiple scenarios!