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The First “What Happens If . . . ?” Formula

One curiosity about small businesses is that small changes in revenue or income can have huge impacts on profits. A retailer who cruises along at \$200,000 in revenue and struggles to live on \$30,000 per year never realizes that boosting the sales volume by 20 percent to \$250,000 might increase profits by 200 percent to \$60,000.

If you take only one point away from this discussion, it should be this curious little truth: If fixed costs don’t change, small changes in revenue can produce big changes in profits.

The following example shows how this point works and provides a secret formula. For starters, say that you currently generate \$100,000 yearly in revenue and make \$20,000 per year in profits. The revenue per item sold is \$100, and the variable cost per item sold is \$35. (In this case, the fixed costs happen to be \$45,000 per year, but that figure isn’t all that important to the analysis.)

Accountants like to whip up little tables that describe these sorts of things, so Table 21-4 gives the current story on your imaginary business.

Table 21-4 shows the current situation. Suppose that you want to know what will happen to your profits if ...

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