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    Sensitivity Analysis

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    Mei Yi Yeo
    This document discusses sensitivity analysis, which is a technique for analyzing uncertainty about the outcomes of decisions. It provides three useful approaches to sensitivity analysis: 1) estimating how much costs and revenues would need to differ from estimates before a decision changes; 2) estimating if a decision would change if costs were x% higher or revenues y% lower than estimated; and 3) estimating how much costs and/or revenues would need to differ from estimates before a decision-maker would be indifferent between options. The document also provides examples of calculating break-even points and analyzing the sensitivity of profits and break-even points to changes in variables like sales, costs, and prices.

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    Sensitivity Analysis

    Uploaded by

    Mei Yi Yeo
    62 views4 pages
    This document discusses sensitivity analysis, which is a technique for analyzing uncertainty about the outcomes of decisions. It provides three useful approaches to sensitivity analysis: 1) estimating how much costs and revenues would need to differ from estimates before a decision changes; 2) estimating if a decision would change if costs were x% higher or revenues y% lower than estimated; and 3) estimating how much costs and/or revenues would need to differ from estimates before a decision-maker would be indifferent between options. The document also provides examples of calculating break-even points and analyzing the sensitivity of profits and break-even points to changes in variables like sales, costs, and prices.

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    Sensitivity analysis (1)

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    This document discusses sensitivity analysis, which is a technique for analyzing uncertainty about the outcomes of decisions. It provides three useful approaches to sensitivity analysis: 1) estimating how much costs and revenues would need to differ from estimates before a decision changes; 2) estimating if a decision would change if costs were x% higher or revenues y% lower than estimated; and 3) estimating how much costs and/or revenues would need to differ from estimates before a decision-maker would be indifferent between options. The document also provides examples of calculating break-even points and analyzing the sensitivity of profits and break-even points to changes in variables like sales, costs, and prices.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    62 views4 pages

    Sensitivity Analysis

    Uploaded by

    Mei Yi Yeo
    This document discusses sensitivity analysis, which is a technique for analyzing uncertainty about the outcomes of decisions. It provides three useful approaches to sensitivity analysis: 1) estimating how much costs and revenues would need to differ from estimates before a decision changes; 2) estimating if a decision would change if costs were x% higher or revenues y% lower than estimated; and 3) estimating how much costs and/or revenues would need to differ from estimates before a decision-maker would be indifferent between options. The document also provides examples of calculating break-even points and analyzing the sensitivity of profits and break-even points to changes in variables like sales, costs, and prices.

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    Sensitivity Analysis

    e
    e

    p c c
    x q

    a b x
    a b

    d d
    Product A Product B

    1. Product A breakeven occurs further to the right of the chart than that for Product B.
     High fixed costs tend to result in high break even points.
     Product B with lower fixed cost has a lower-breakeven point although marginal
    cost is greater.
    2. The angle p for Product A is greater than angle q for Product B.
     The angle of intersection is an indication of the sensitivity of a product to
    variations in the level of activity.
     Example, as output increases for both of the product, Product A’s profitability
    increases at a faster rate as compared to B.
     If output decreases for both products, Product A’s profitability decreases at a
    faster rate than B.
     Therefore, Product A is more sensitive to changes in output than Product B.

    Profit and break-even points are said to be sensitive to changes in price and cost.

    Compiled by: Cheryl. TYX


    Sensitivity Analysis

    A technique for analysing uncertainty about the outcome of a decision.

    1. All forecasts are predictions of future outcomes. Forecasts of profitability are based on
    the accuracy of the productions of future costs and future revenues.
    2. The starting point is an estimate of what the outcome will be based on estimates for key
    variables, such as selling price, sales volume and unit variable cost fixed cost
    expenditures.
    3. Sensitivity analysis may be used because there is uncertainty about some of these
    estimates.

    3 useful approaches:

    a) To estimate by how much costs and revenues would need to differ from their estimated
    values before the decision would change
    b) To estimate whether a decision would change if estimated costs were x% higher than
    estimated, or estimated revenues y% lower than estimated
    c) To estimate by how much costs and/or revenues would need to differ from their estimated
    values before the decision-maker would be indifferent between two options

    Class Exercise

    Awesome Co has estimated the following sales and profits for a new product which it may
    launch on to the market.

    $ $
    Sales (2,000 units) 4 000
    Direct materials 2 000
    Direct labour 1 000 3 000
    Contribution 1 000
    Fixed costs 800
    Profit 200

    REQUIRED

    Analyse the sensitivity of the project to changes on key variables.

    Compiled by: Cheryl. TYX


    Example 1

    Planned sales of ‘diorth’ are 5 000 units at $20 per unit.

    Variable costs are predicted to be $5 per unit.

    Fixed costs are estimated to be $52 000.

    A forecast income statement based on this information shows:

    $ $
    Sales (5 000*$20) 100 000
    Variable costs (5 000*$5) (25 000)
    Fixed costs (52 000) (77 000)
    Profit 23 000
    000)*100
     Example 2

     The following information relates to budget for a certain product.

    No. of units produced and sold: 10 000


    $
    Sales revenue 180 000
    Variable costs 50 000
    Fixed costs 100 000
    Profit 30 000

    a) Calculate the breakeven point in units.


    b) Calculate the profit and the break-even points if
    i. Fixed costs rise by 10% and not passed on to customer.
    ii. Variable costs increases by 10% and are not passed to customers (no change in
    fixed cost)
    iii. Selling price per unit is only 90% of expectation and no change in cost
    iv. Selling price per unit is only 90% of expectation and fixed costs increases by 10%
    v. If all costs increases by 10% and are not passed to customers, selling price per unit
    is only 90% of expectation.

    Compiled by: Cheryl. TYX


    Example 3

    The following information relates to budget for a certain product.

    No. of units produced and sold: 20 000


    $
    Fixed costs 80 000
    Variable costs 60 000
    Total costs 140 000
    Sales 175 000
    Profit 35 000

    a) Calculate the breakeven point in units.


    b) Calculate the profit and the break-even points if
    i. Fixed costs rise by 15% and not passed on to customer.
    ii. Variable costs increases by 15% and are not passed to customers (no change in
    fixed cost)
    iii. Fixed and variable costs increase by 15% and the increase are passed on to the
    customers.

    Example 4

    Gentle Ltd makes 3 products, A, B and C. All 3 products are made from the same materials.
    The production budget for June is as follows:

    A B C
    Budgeted production (units) 1 000 2 000 4 000
    Materials per unit (kg) 2 4 5
    Direct labour per unit (hours) 3 5 6
    Selling price per unit $80 $130 $150

    Material cost: $10 per kg


    Labour rate per hour: $12
    Total fixed cost for June: $115 000

    REQUIRED

    a) Calculate the budgeted profit for June. Show your workings.

    After the budget for June was prepared, Gentle Ltd learned that there was a shortage of
    material and that it would not be able to obtain more than 28 000 kg in June.

    REQUIRED

    b) Prepare a revised production budget which will ensure that Gentle Ltd can maximise
    profit from available materials and calculate the budgeted profit.
    c) State 3 assumptions which are made in the preparation of break-even charts, and state one
    limitation for each assumption.

    Compiled by: Cheryl. TYX

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