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?

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.