Sensitivity Analysis

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