Everything the calculator does, written out: what goes in, every formula, the assumptions, a worked example you can follow with a pocket calculator, and what it leaves out. Nothing is hidden, so the result can be checked by anyone.
It is a differential analysis, also called incremental or relevant-cost analysis: the business with a change compared with the business without it, counting only what differs. This is a standard management accounting method for decisions such as dropping a product line, outsourcing, or cutting a department.
It is not a financial statement and it does not claim financial statements are wrong or that anyone is hiding anything. Companies report what the rules require, bad news included. What the rules do not require is tracing a decision through to everything it later affects. An income statement correctly records what was paid. It records transactions, so it cannot show income that a decision caused not to happen. That is an opportunity cost, which has to be estimated separately. This tool estimates it and puts it beside the saving.
Its results are estimates built on the user's own inputs. It is a way to structure a judgement and to find the assumption the answer depends on. It does not predict.
Costs that are easily dismissed, easily missed, or that rest on a false assumption. None of them is hidden by anyone. They are hidden by where they fall: under another heading, in a later period, or nowhere, because income that is never earned leaves no transaction to record.
The commonest false assumption is that labor is a cost. Payroll is the cost, and it is correctly booked as an expense. Labor is what the payroll buys, and what justifies paying it: the work produced, the knowledge behind it, the skills, the training that built them, and the supplies and tools the work uses. The mistake is to read the payroll line as the whole of labor. An expense line shows what a worker costs. No line shows what a worker produces. The calculator applies this to a planned cut, not to a person: it asks what the cut would save and what the work it removes was producing. Remove the expense and the saving appears at once, in full, beside the decision. What it was producing falls away later and is recorded, if at all, as lower sales with no cause attached.
The same applies to any resource that feeds income: maintenance, marketing, training, a supplier, a tool. The calculator asks what relied on the thing being cut, and counts that beside the saving.
| Item | Where the books show it | Why it is counted here |
|---|---|---|
| The saving | The expense line that falls. | It is the reason for the decision, and the figure everything else is measured against. |
| One-time cost | Booked, beside the decision, usually as a one-off or restructuring item. | A cash cost that exists only because of the decision. |
| Side costs | Booked, but under other headings and often in later periods: overtime, rework, returns, recruitment. | They are caused by the decision although nothing in the ledger ties them to it. This is the part most easily missed. |
| Lost contribution | Not booked. A sale that does not happen is not a transaction. | It is the opportunity cost, and in a differential analysis an opportunity cost is a relevant cost. This is the part most easily dismissed, because it is an estimate. |
| Expected reversal cost | Not booked unless the decision is later undone. | The decision carries the risk from the day it is made. It is entered as probability times cost. |
What is deliberately not counted. Sunk costs, because they are the same whichever way the decision goes. Fixed overhead that does not change with the decision, for the same reason. Revenue as such: the loss is taken at contribution margin, so the variable costs that fall along with the lost sales are not counted as a loss. And the cost being cut is kept out of that margin, so the saving is not counted twice.
| Symbol | On screen | Unit | Meaning, and the accounting term |
|---|---|---|---|
| S | Expected saving (or gain) each year | $ / year | Reduction in operating cost, or added income, expected from the change. |
| C0 | One-time cost of making the change | $ | Restructuring or switching cost: severance, penalties, set-up. Paid at the start. |
| D | Yearly income that relies on it | $ / year | Revenue that could not be earned without the thing being cut. |
| c | How much of it you are cutting | 0 to 1 | Share of that resource removed. |
| s | How much of the cut was truly spare | 0 to 1 | Idle capacity: the share of what is cut that was producing nothing. |
| g | Contribution margin on that income | 0 to 1 | Contribution margin ratio: what is kept from each dollar of D after its other variable costs. It must leave out the cost being cut, or the saving is counted twice. |
| w1..wn | What relies on it, and how strongly | 0, 0.5 or 1 each | One strength for each part of the business marked as relying on it. "Partly" is 0.5, "Fully" is 1. A model assumption; see below. |
| t0 | Months before the loss shows up | months | Lag before lost income begins (orders already in hand, stock, goodwill). |
| k | Side costs each year | $ / year | Incremental operating costs caused by the change and booked elsewhere: overtime, rework, returns, replacing people who leave. |
| p | Chance you have to undo it | 0 to 1 | Probability of reversing the change within the period. |
| U | Cost of undoing it | $ | Cost of reversal: rehiring, retraining, re-contracting. |
| T | Look ahead | months | Years entered, times 12, rounded to whole months. |
| r | Discount rate | per year | Cost of capital. 0 gives plain sums; above 0 gives present values. |
The "Lay off staff" example, step by step. These figures are calculated live by the same code the calculator uses, so this section cannot drift out of step with it. The inputs are illustrative round numbers, not data from any company.
The everyday decisions use shorter sums. The working for the figures on screen is shown on that page under "Show the working".
By hand. Follow the worked example above with a calculator, or put F1 to F10 in a spreadsheet with one row per month.
By running the tests. The code ships with eight test files. With Node.js installed, in the folder holding the files:
Independent verification. verify_test.js contains a second implementation written from the formulas on this page, one month at a time like a spreadsheet, sharing no code with the calculator. It compares nine figures across 500 random cases, checks the discounting against the textbook annuity formula, the break-even figure by substitution, and the climb-out figures against the textbook loan-term formula.
The example inputs throughout the tool are illustrative and are not drawn from these sources.
