Which of the following actions will ordinarily improve a firm's profit margin and return on investment (ROI)?

• A. Increasing fixed costs without increasing output
• B. Lowering prices in a competitive market without increasing sales volume
• C. Reducing variable costs while keeping revenue constant
• D. Expanding production when marginal cost exceeds marginal revenue

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the definitions of profit margin and return on investment (ROI). Profit margin is typically calculated as \(\frac{\text{Profit}}{\text{Revenue}}\), and ROI is calculated as \(\frac{\text{Net Profit}}{\text{Investment}}\). Both metrics improve when profits increase relative to revenue or investment.
2. Step 2: Analyze the effect of increasing fixed costs without increasing output. Since fixed costs increase but output and revenue remain the same, total costs rise, reducing profit and thus lowering profit margin and ROI.
3. Step 3: Consider lowering prices in a competitive market without increasing sales volume. Lower prices reduce revenue per unit sold, and if sales volume does not increase, total revenue falls while costs remain constant, decreasing profit margin and ROI.
4. Step 4: Evaluate reducing variable costs while keeping revenue constant. Lower variable costs reduce total costs without affecting revenue, which increases profit. Higher profit with the same revenue and investment improves both profit margin and ROI.
5. Step 5: Assess expanding production when marginal cost exceeds marginal revenue. Producing additional units at a cost higher than the revenue they generate reduces overall profit, thereby decreasing profit margin and ROI.