Sensitivity analysis

Definition

Sensitivity analysis evaluates how different values of an independent variable affect a particular dependent variable under a given set of assumptions. It's used to predict the outcome of a decision given a certain range of variables in managerial accounting.

5 Must Know Facts For Your Next Test

1. Sensitivity analysis helps in understanding the impact of changes in sales volume, costs, and prices on profit.
2. It is essential for risk assessment and decision-making processes.
3. Often involves changing one variable at a time while keeping others constant to isolate effects.
4. Commonly used in conjunction with Cost-Volume-Profit (CVP) analysis to determine break-even points under various scenarios.
5. Provides insights into which variables have the most significant impact on profitability.

Review Questions

• What is the primary purpose of conducting sensitivity analysis in managerial accounting?
• How does sensitivity analysis help in risk assessment?
• Why is it important to change only one variable at a time during sensitivity analysis?

Related terms

Break-Even Point:

The sales amount—in either unit or revenue terms—at which total revenues equal total costs, resulting in no profit or loss.

Cost-Volume-Profit Analysis:

A method that helps managers understand the interrelationships between cost, volume, and profit by focusing on interactions among these factors.

Fixed Costs:

Costs that do not vary with the level of production or sales within a certain range, such as rent or salaries.