Scribd
Upload
28 views16 pages

1 Sensitivity Analysis 1

The document discusses sensitivity analysis and how it is used to determine the impact of changes in independent variables like sales on dependent variables like net income. It provides details on how to perform a sensitivity analysis including developing a forecasted income statement, identifying variable and fixed costs, and increasing and decreasing sales and variable costs to analyze the impact on net income under different scenarios.

Uploaded by

SHARMA NIKHIL
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
28 views16 pages

1 Sensitivity Analysis 1

The document discusses sensitivity analysis and how it is used to determine the impact of changes in independent variables like sales on dependent variables like net income. It provides details on how to perform a sensitivity analysis including developing a forecasted income statement, identifying variable and fixed costs, and increasing and decreasing sales and variable costs to analyze the impact on net income under different scenarios.

Uploaded by

SHARMA NIKHIL
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 16

“A detailed examination of anything complex in

order to understand its nature or to determine


its essential features”
Sensitivity Analysis
Analysis effect of changes in sales, costs etc on project.
Scenario Analysis
It is a way of predicting future values based on certain
scenario.
Simulation Analysis
Estimate probabilities of different outcomes.
Break even Analysis
Revenue = Total Variable cost + Total Fixed cost.
The technique used to determine how independent variable
values will impact a particular dependent variable under a
given set of assumptions is defined as Sensitivity Analysis.
A Sensitivity Analysis is a "what-if" tool that examines the
effect on a company's Net Income when sales levels are
increased or decreased. For example, the sensitivity analysis
can answer the following questions.
"WHAT" would be my forecasted net income, "IF" my sales
forecast is 30%, 20%, or 10% too high?
"WHAT" would be my forecasted net income, "IF" my sales
forecast is 30%, 20% or 10% too low?
1. What would my bottom line be if I sold 10% more units than I originally
forecasted?

2. What would my bottom line be if I sold 20% more units than I originally
forecasted?

3. What would my bottom line be if I sold 30% more units than I originally
forecasted?

4. What would my bottom line be if I sold 10% fewer units than I originally
forecasted?

5. What would my bottom line be if I sold 20% fewer units than I originally
forecasted?

6. What would my bottom line be if I sold 30% fewer units than I originally
forecasted?
Note(the bottom line is a company's income after all expenses have been deducted from
revenues)
◦ develop your forecasted income statement;
◦ set your sales percentage factors (10%, 20%, and
30% for instance); look at each cost & expense and
determine which is a variable cost and which is a
fixed cost;
◦ Increase & decrease the sales in dollars at the
various sales percentage (%) factors;
◦ Increase & decrease the variable costs at the
various
sales percentage (%) factors;
◦ The fixed costs will remain the same at various
sales increases & decreases;
◦ Apply a tax rate to the net income before taxes to
arrive at the Net Income After Taxes (optional).

Don't get frustrated when distinguishing between a variable cost and a fixed costs. All you
have to do is ask yourself - "will this cost or expense increase or decrease if I sell one
additional unit or sell one fewer unit?" If the answer is yes, then it's a variable cost AND if
the answer is no, then it's a fixed cost
Variable Costs
A variable cost is a company's cost that is associated with the amount of
goods or services it produces. A company's variable cost increases and
decreases with the production volume. For example, suppose company ABC
produces ceramic mugs for a cost of $2 a mug. If the company produces
500 units, its variable cost will be $1,000. However, if the company does
not produce any units, it will not have any variable cost for producing
the mugs.
On the other hand, a fixed cost does not vary
with the volume of production. A fixed cost does
not change with the amount of goods or services
a company produces. It remains the same even if
no goods or services are produced. Using the
same example above, suppose company ABC has
a fixed cost of $10,000 per month for the
machine it uses to produce mugs. If the company
does not produce any mugs for the month, it
would still have to pay $10,000 for the cost of
renting the machine.
Partial Sensitivity Analysis: In a partial sensitivity analysis,
you select one variable, change its value while holding the values of
other variables constant.
Best-case and worst-case scenarios:
Best- and worst-case scenarios establish the upper (best-case) and lower
(worst-case) boundaries.
Simplicity
Help in decision making
Help in quality check
Help in proper allocation of
resources
Its does not provide clear-cut results
Based on assumptions
THANK YOU

You might also like