How cutting staff can increase profitability (if at all)?

Let c1 be a share of costs generating r1 share of revenue and c2 be a

share of costs generating r2 share of revenue, such that 𝑐1 + 𝑐2 = 1 and
𝑟1 + 𝑟2 = 1.
Let R0, C0 and P0 – be original revenue, cost, and profit, and R1, C1 and P1
– be revenue, cost, and profit after cost cutting, where by cost cutting
one means 𝑐2 = 0 and 𝑟2 = 0.
Let effect of cost cutting be ratio of profit and cost before and after the
cost cutting:
𝑃1 𝐶0
𝑒= .
𝐶1 𝑃0
Since
𝑃0 = 𝑅0 − 𝐶0
𝑃1 = 𝑅1 − 𝐶1 = 𝑟1 𝑅0 − 𝑐1 𝐶0
𝐶1 = 𝑐1 𝐶0
then
𝑟1 𝑅0 − 𝑐1 𝐶0 𝐶0
𝑒=
𝑐1 𝐶0 𝑅0 − 𝐶0
𝑟1 𝐶0
−
𝑐1 𝑅0
𝑒=
𝐶
1− 0
𝑅0
If there is no profit originally (𝐶0 = 𝑅0 ) then
𝑒0 = ∞.
Thus, the lower the original profitability the higher the effect. Minimum
efficiency
 𝑟1 𝐶0
− 𝑟1
𝑐1 𝑅0
𝑒𝑚𝑖𝑛 = lim ( )= .
𝐶0 𝐶0 𝑐1
𝑅0 →0 1 − 𝑅
0

Cost cutting will not make sense if after the cost cutting the loss would
not turn into profit, i.e.
𝑒=0
𝑟1 𝑅0 − 𝑐1 𝐶0 = 0
𝑃0 𝑐1
= −1
𝐶0 𝑟1
Example: if (Pareto style) 20% of costs generate 80% of revenue, then
𝑐1 = 0.2, 𝑟1 = 0.8 and
𝑒𝑚𝑖𝑛 = 4
𝑃0
𝑒 = 0 at = −0.75
𝐶0

i.e. if loss is 75% of costs and above cost cutting will be feasible.