Assemble details of what might be involved in any changes you are considering making to your enterprise, then summarise these changes using the categories in the table (below):
Change scenario 1
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Example $$ for change 1
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a1
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Additional income
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$60,000
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a2
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Reductions in income.
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$10,000
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A
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Net Change in Income (a1 – a2 = A)
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$50,000
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b1
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Additional Enterprise costs.
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$15,000
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b2
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Reductions in Enterprise costs.
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$0
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B
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Net Change In Enterprise Costs (b1 – b2 = B)
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$15,000
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C
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Increase in Gross Margin (A – B = C)
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$35,000
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d1
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Additional Overhead costs.
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$2,000
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d2
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Reductions in Overhead costs.
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$0
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D
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Net Change in Overhead Costs (d1 – d2 – D)
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$2,000
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E
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Increase in Profit before Interest and Tax (C – D = E)
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$33,000
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F
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Extra Capital Invested
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$200,000
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G
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% Return on Capital Invested (E ÷ F) x 100**
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16.5%**
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** Interpret this figure carefully as it is based on the marginal change in capital. This is used for comparing among the change scenarios only, not with the ‘current situation’.
The return on investment in the above example does NOT account for the cost of capital used. For instance, if you took out a $200,000 loan to cover the costs of the new scenario, this process would NOT account for at least $14,000 in interest costs (assuming an interest rate of 7%). As long as the return on capital invested is higher than the average cost of debt, this investment is generating a positive return to the business.
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