01 / Learn the method
Learning outcomes
Evaluate capacity, ramp-up and cash before approving a hire. Calculate the result, reconcile it and communicate its limitations.
Method
Incremental hiring value depends on demand that current capacity cannot serve. Model the lower of demand and capacity, then subtract incremental cash costs. A profitable option can still breach a cash buffer before customer receipts arrive. Compare the same horizon for all options and disclose what happens beyond it.
Smaller worked example
An additional 100 units of capacity at $40 contribution per unit is worth at most $4,000. If only 20 additional units can be sold, the benefit is $800 before salary and setup costs.
02 / Put it to work
Business context and rules
Fictional Beacon Services, October-December 2026. Current team capacity 1,000 units/month; base demand 1,200 / 1,400 / 1,600. A new hire starts 1 October, adding capacity of 200 / 400 / 600 in successive months. Price $100, variable cash cost $60 per unit; salary $10,000/month and one-time setup $5,000 in October, paid immediately. Customers pay the following month; variable costs are paid in delivery month. Incremental cash starts at $30,000, with a $10,000 minimum buffer. Compare Hire now against No hire over Q4; also test downside demand 1,100 every month. Ignore tax and other cash flows. December receipts arrive in January and must be disclosed, not silently counted in Q4.
Original synthetic inputs
| Input | Value | Unit |
|---|---|---|
| Current monthly capacity | 1000 | units |
| October demand | 1200 | units |
| November demand | 1400 | units |
| December demand | 1600 | units |
| October added capacity | 200 | units |
| November added capacity | 400 | units |
| December added capacity | 600 | units |
| Price | 100 | USD / unit |
| Variable cash cost | 60 | USD / unit |
| Monthly incremental salary | 10000 | USD |
| October setup cash and expense | 5000 | USD |
| Incremental opening cash | 30000 | USD |
| Minimum cash buffer | 10000 | USD |
| Downside demand per month | 1100 | units |
Required deliverables
Prepare the two operating scenarios, monthly incremental cash and minimum headroom. Deliver three short slide outlines: economics, liquidity, recommendation / evidence needed. Explain what a later hire would require you to remodel rather than assuming full capacity on day one.
Use formulas for derived amounts and preserve source data. Put narrative deliverables in the workbook response area; expand it as needed. Compare amounts within 0.01 of the stated unit and percentages within 0.1 percentage point. No unsupported balancing plugs.
Workbook structure
The student workbook intentionally leaves the analysis structure open. Build the schedules required above, retain the source inputs, and add formula-based checks. You may add worksheets. The worked solution is one acceptable structure, not the only correct layout.
03 / Review your work
Try the assignment before opening the answer.
Open the worked answer and notes
Worked numerical schedule
| Measure | Value | Unit |
|---|---|---|
| October incremental units | 200.00 | units |
| November incremental units | 400.00 | units |
| December incremental units | 600.00 | units |
| Base incremental contribution | 48,000.00 | USD |
| Base Q4 incremental profit | 13,000.00 | USD |
| End October incremental cash | 3,000.00 | USD |
| End November incremental cash | -11,000.00 | USD |
| End December incremental cash | -17,000.00 | USD |
| Minimum Q4 cash headroom | -27,000.00 | USD |
| January receipts from December delivery | 60,000.00 | USD |
| Downside Q4 incremental profit | -23,000.00 | USD |
| Profit to cash bridge residual | 0.00 | USD |
Interpretation and recommended actions
Base incremental profit is $13,000 but month-end cash is $3,000 / -$11,000 / -$17,000. The minimum buffer shortfall is $27,000. January receipts are $60,000; they do not fund the Q4 trough. Downside profit is -$23,000. Do not approve solely on the positive base profit: confirm demand, arrange cash capacity, or remodel a later start or payment terms. The cash model is incremental; existing company cash flows could improve or worsen the full-company picture.
Scoring rubric - 100 points
| Dimension | Points | Awarding guidance |
|---|---|---|
| Calculation | 40 | Capacity economics 15; base / downside profit 10; timing and cash 15. |
| Interpretation | 25 | Correct application of the case rules 10; explain the business decision 10; identify evidence or limitations 5. |
| Controls / audit trail | 20 | Traceable formulas 8; independent reconciliation 8; explicit units and signs 4. |
| Communication | 15 | Decision and numerical headline 5; actions with owners and evidence 5; concise response covering all required deliverables 5. |
Award method credit after an isolated arithmetic error rather than repeatedly deducting for it. Equivalent account labels and well-supported alternative recommendations are acceptable. Numerical tolerance is 0.01 in the stated units; no universal passing score is prescribed.
Common mistakes
Selling more units than demand; omitting ramp-up; including December receipts early; treating contribution as cash available today.
Staged hints
Incremental units equal served demand with hire less served demand without hire. Delay receipts one month. Reconcile profit to cash through ending receivables.
Instructor notes
Prerequisites: Contribution margin and cash forecasting. The total duration of 90-120 minutes is a planning estimate, not a tested completion time. Allocate class time according to prior knowledge and reserve time for discussion of the decision and evidence.
For a simpler class, provide the model structure and work through one driver. For an extension, change one operational assumption and require a new reconciliation and recommendation. Verify the new key before distributing any variant. Open files in the intended spreadsheet application before class. Solutions are learning resources, not secure hiring examinations.
Decision
Do not approve the hire solely on positive incremental profit; confirm demand and the capacity to fund the cash trough.
Evidence and reasoning
Revenue earned before collection creates a working-capital need. January receipts cannot pay Q4 obligations, and this incremental case excludes the rest of the company's cash flows.
What would change the conclusion
Contracted demand, earlier payment terms, a funded buffer or a later start date could change the decision. Rebuild the profit and cash schedules together.
Related learning
Version 1.1. Synthetic teaching case. Completion time is an estimate.