We are considering purchasing a new machine at a cost of $500k, using existing funds rather than debt, and want to know how much we need to sell.
Assumptions made in this example:
Which levers will be affected?
Lever | Impact – Scenario 1 | Impact – Scenario 2 |
Price | – | – |
Volume | 20 | Enter various volume % changes to find the minimum volume increase for a Yes/Yes decision |
DC – Wages | Variability 100% | Variability 100% |
DC – Other | Variability 100% | Variability 100% |
IDC – Wages | Variability 25% | Variability 25% |
IDC – Other | Variability 25% | Variability 25% |
AR Days | – | – |
Inventory Days | – | – |
AP Days | – | – |
Fixed Assets | 500 | 500 |
Enter 20 in the Volume Change %, 100% Direct Costs Wages variability, 100% Direct Costs Other variability, 25% in the Indirect Costs Wages and Other variability, 500 (k) in the Fixed Assets $000.
This is a Yes/Yes decision. Both ROO and operational cash flow would increase.
Now let’s enter a 13% volume increase, leaving all other levers the same.
It is still a Yes/Yes decision.
Try a 12% Volume increase.
At 12% it is just a Yes/Yes decision.
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