Sensitivity Analysis

( Cost-Volume-Profit Model )
Sensitivity Analysis
- An analysis method used to identify how much variations in the
input values for a given variable will impact the results for a
mathematical model.
- Also referred to as “What-if or Simulation analysis”.
- Sensitivity is calculated by dividing the percentage change in
output by the percentage change in input.
- It is a way to predict the outcome of a decision given certain
range of variables.
- Can be applied in different principles such as business analysis,
investing, environmental studies, engineering, physics,
chemistry, economics, etc.
- In business, this allows you to understand the effect of
fluctuations in selected variables on your business’ profitability.
Cost-Volume-Profit (CVP) Analysis
- A method of evaluating how changes in costs and volume will
impact company’s profit.
- Determines the break-even points for cost structures with different
sales volumes.
- Can be used for single-product, multiple-product and services, and
to perform sensitivity analysis.
- An integral part of the firm’s profit planning process.

FACTORS AFFECTING PROFIT

1. Variable cost
2. Fixed cost
3. Volume or units
4. Selling price
 CVP Analysis

Project analysis slide 2

CONTRIBUTION MARGIN RATIO BREAK-EVEN POINT

BEP in units = Total Fixed

CM RATIO = CM/SALES
Costs/CM per unit

CHANGES IN INCOME COMPONEN MARGIN OF SAFETY

TS

No. of units = (FC + Target MOS = Actual Sales – Break-

Profit)/CM per unit even Sales

DEGREE OF OPERATING
LEVERAGE

DOL = CM/Net Income

CVP ANALYSIS EXAMPLE
Given : Sales price per unit ₱ 250
Variable cost per unit ₱ 150
Fixed Cost per month ₱ 50,000

Contribution Margin Ratio = Contribution Margin per unit/Sales per

unit
= (250-150) / 250
= 100 / 250
= 0.4 or 40%
EXAMPLE
Given : Sales price per unit ₱ 250
Variable cost per unit ₱ 150
Fixed Cost per month ₱ 50,000

Break-even point in units = Fixed Costs / Contribution

Margin per unit
= 50,000 / (250 -150)
= 50,000 / 100
= 500 units
EXAMPLE
Given : Sales price per unit
Variable cost per unit
₱
₱
250
150
Fixed Cost per month ₱ 50,000
Target Profit ₱ 30,000

Target units = (Fixed Cost + Target Profit) / Contribution Margin per

unit
= (50,000+30,000) / 100
= 80,000 / 100
= 800 units
EXAMPLE
Given : Sales price per unit ₱ 250
Variable cost per unit ₱ 150
Fixed Cost per month ₱ 50,000
Units 700

Margin of Safety = Actual Sales or units – Break-even Sales or units

= 700 - 500
= 200 units or
= ₱ 50,000 sales (200x250)
EXAMPLE
Given : Sales price per unit ₱ 250
Variable cost per unit ₱ 150
Fixed Cost per month ₱ 50,000
Units 700

Degree of Operating Leverage – Contribution Margin in peso / Net

Income
= (175,000 – 105,000) / (70,000 – 50,000)
= 70,000 / 20,000
= 3.5
Illustration:
Cost-Volume-Profit Analysis Chart
300,000
250,000 Actual Sales
Break-even Point
200,000
₱175,000
150,000 Margin of Safety
₱125,000
Pesos

100,000
50,000
₱20,000
- ₱0
0 100 200 300 400 500 600 700 800 900 1000
-50,000
-100,000
Units

Total Costs Total Sales Profit

Using CVP Model for Sensitivity Analysis
- Sensitivity analysis shows how the CVP model will
change with changes in any of its variables (fixed costs,
variable costs, sales price, or sales mix).
- The focus is typically on how changes in variables will
affect PROFIT.
- Sensitivity analysis can also be used in break-even and
target income sales calculations
SENSITIVITY ANALYSIS EXAMPLE
1. How will profit change if
Sales price per unit ₱ 250 the sales price increases
by ₱25 per unit (10%)?
Variable cost per unit ₱ 150
Fixed Cost per month ₱ 50,000 2. How will profit change if
Units 700 sales volume decreases
by 70 units (10%)?
Contribution Margin Income Statement
3. How will profit change if
Sales ₱ 175,000 variable costs increase by
Variable costs 105,000 ₱15 per unit (10%)?
Contribution margin 70,000
Fixed Cost 50,000 4. How will profit change if
fixed costs decrease by
Operating profit ₱ 20,000 ₱5,000 (10%)?
SENSITIVITY ANALYSIS EXAMPLE
Base Case Price Sales volume Variable cost Fixed cost
10% increase 10% decrease 10% increase 10% decrease

Sales price per unit ₱ 250 ₱ 275 ₱ 250 ₱ 250 ₱ 250

Variable cost per unit ₱ 150 ₱ 150 ₱ 150 ₱ 165 ₱ 150
Fixed Cost per month ₱ 50,000 ₱ 50,000 ₱ 50,000 ₱ 50,000 ₱ 45,000
Units 700 700 630 700 700

Sales ₱ 175,000 ₱ 192,500 ₱ 157,500 ₱ 175,000 ₱ 175,000

Variable costs 105,000 105,000 94,500 115,500 105,000
Contribution margin 70,000 87,500 63,000 59,500 70,000
Fixed Cost 50,000 50,000 50,000 50,000 45,000
Operating profit ₱ 20,000 ₱ 37,500 ₱ 13,000 ₱ 9,500 ₱ 25,000

Change in Net profit ₱ 17,500 -₱ 7,000 -₱ 10,500 ₱ 5,000

Percentage changes in Profit 87.5% -35.0% -52.5% 25.0%
Sensitivity Level 8.75 3.5 5.25 2.50
Expanding the use of Sensitivity
Analysis
Break-even point in units = Fixed Costs / Contribution Margin per unit
= 50,000 / (250 -150)
= 50,000 / 100
= 500 units

Break-even point in units = Fixed Costs / Contribution Margin per unit

= 50,000 / (275 -150)
= 50,000 / 125
= 400 units
EXAMPLE
Target units = (Fixed Cost + Target Profit) / Contribution Margin per unit
= (50,000+30,000) / 100
= 80,000 / 100
= 800 units

Target units = (Fixed Cost + Target Profit) / Contribution Margin

per unit
= (50,000+30,000) / (275-150)
= 80,000 / 125
= 640 units
Activity:
The following is the projected operating profit or loss of the Company.
Sales ₱ 100,000
Variable costs 60,000
Contribution margin 40,000
Fixed Cost 20,000
Operating profit ₱ 20,000

The management of a company is concerned with the accuracy of the estimations and how sensitive profit is
to any changes in the projected assumptions. They require answers to the following “what if” questions:
•The business is forced to cut prices by 10% to maintain sales.
•Demand on the company’s product will cause a 20% increase in sales volume.
•Variable costs decrease by 15%.
•Fixed costs increase by 5%.
Calculate the profit/loss in each independent question and the sensitivity ratings.
Solution
Thank You