Sensitivity analysis examines how changes to independent variables like sales, costs, or prices impact a dependent variable like net income. It involves developing a forecast income statement, identifying which costs are fixed and variable, and then adjusting the independent variables to see their effect on net income. This allows analysis of best, worst, and partial cases to inform decision making and resource allocation under different assumptions. However, sensitivity analysis does not provide definitive results and relies on assumptions.

2. “A detailed examination of anything complex in order
to understand its nature or to determine its essential
features”

3.  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.

4.  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.

5.  "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?

6.  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)

7. ◦ 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;

8. ◦ 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

9.  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.

10.  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.

11.  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.

13.  Simplicity
 Help in decision making
 Help in quality check
 Help in proper allocation of resources

14.  Its does not provide clear-cut results
 Based on assumptions