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What is sensitivity analysis? How do managers use this tool?

Short Answer

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Answer

A sensitivity analysis is a “what if” technique.

Step by step solution

01

Sensitivity analysis

A sensitivity analysis is a “what if” technique. It helps in assessing profit or loss results if sales price, costs, volume, or underlying assumptions change.

02

How do managers use sensitivity analysis

Managers keep low breakeven points so that the targets can be easily achievable. But they do not overemphasize this aspect of CVP analysis.

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Most popular questions from this chapter

Identifying variable, fixed, and mixed costs Holly’s Day Care has been in operation for several years. Identify each cost as variable (V), fixed (F), or mixed (M), relative to number of students enrolled.

1. Building rent.

2. Toys.

3. Compensation of the office manager, who receives a salary plus a bonus based on number of students enrolled.

4. Afternoon snacks.

5. Lawn service contract at $200 per month.

6. Holly’s salary.

7. Wages of afterschool employees.

8. Drawing paper for students’ artwork.

9. Straight-line depreciation on furniture and playground equipment.

10. Fee paid to security company for monthly service.

A furniture manufacturer specializes in wood tables. The tables sell for \(100 per unit and incur \)40 per unit in variable costs. The company has \(6,000 in fixed costs per month. Calculate the breakeven point in units under each independent scenario.

14. Variable costs increase by \)10 per unit.

15. Fixed costs decrease by $600.

16. Sales price increases by 10%.

No Slip Co. produces sports socks. The company has fixed costs of\(91,080 and variable costs of \)0.81 per package. Each package sells for $1.80.

Requirements

1. Compute the contribution margin per package and the contribution marginratio. (Round your answers to two decimal places.)

2. Find the breakeven point in units and in dollars using the contributionmargin approach.

A chain of convenience stores has one manager per store who is paid a monthly salary. Relative to the number of stores, is the manager’s salary fixed or variable? Why?

How can CVP analysis be used by companies with multiple products?

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