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  • About Us
    • Nick Setchell – RealTime CEO
    • Vistage & TEC WorkshopsNick Setchell has been working with Vistage, the world’s largest CEO organization, since 2001.
    • NewsSee what’s happening with RealTime CEO.
    • Economic Update Report
    • Contact UsReach out to us. If you’re interested in booking Nick to give a keynote address or workshop at your conference, please include the date and location.
  • Concepts
    • Fiscal Focus Financial Statement AnalysisUnlock the hidden numbers in your P&L and balance sheet to see how you’re performing in 11 vital metrics.
    • Should We? / Can We?View, in real time, the actual financial impact of the hundreds of business decisions your team makes every month.
    • 24 Month Rolling ForecastingBlend your trailing twelve months with a rolling 12-month forecast to get a complete financial picture of your business.
    • J Curve ManagementTrack the number of investments you’re undertaking, the 3 phases of each, and the 5 rules for managing them.
    • Return on Operations – ROOView your return on operations percentage — your ROO % — the most powerful number to measure business success.
    • CEO Performance AnalysisBenchmark your performance as a private-company CEO against others in your industry.
  • Resource Center
  • Blog
  • Login
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Crystal Ball Example: If we purchase a new machine, what additional volume do we need to sell to make it worthwhile?

If we purchase a new machine, what additional volume do we need to sell to make it worthwhile?

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:

  • Expected Volume increase of 20%
  • Direct Costs Wages – there is no spare capacity, so the variability is set to 100%, meaning if volume increases by 20%, Direct Wages will also increase 20%
  • Direct Costs Other – there is no spare capacity, so the variability is set to 100%, meaning if volume increases by 20%, Direct Costs Other will also increase 20%
  • Indirect Costs Wages and Other – we have left the variability at the default of 25%, meaning if volume increases by 20%, Indirect costs will increase by 25% of 20% = 5%.
  • In scenario 2 we are trying to determine the least volume increase for the decision to still be worthwhile.

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

Scenario 1: Volume increase of 20%

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.

Scenario 2: What is the least volume increase for it to still be a Yes/Yes decision?

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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