Question

How might the Apple company use the Sensitivity analysis "what if" technique that estimates profit or loss results if sales price, cost, volume or underlying assumptions change? Provide a scenario based using Apple's Iphone? Explain the benefits and disadvantages of the method?

Answer 1

Sensitivity analysis, also called ‘What-if’ analysis is a method of analysing the profitability when the relevant factors are not known with certainty. It helps determine how the profitability is affected consequent to change in one input variable. One input variable is changed, keeping all the other inputs constant.

For example, let us examine the case of profit or loss results for an Iphone. Inputs for calculation for profit are sales price, cost, volume.

All amounts in $
Particulars	Original estimates	If sales price increases	If sales price decreases	If Volume increases	If volume decreases	If variable cost increases	If variable cost decreases	If Fixed costs increase	If Fixed costs decrease
Sales price per unit	60000	70000	50000	60000	60000	60000	60000	60000	60000
Volume	100	100	100	150	80	100	100	100	100
Variable cost per unit	30000	30000	30000	30000	30000	40000	25000	30000	30000
Fixed costs	40000	40000	40000	40000	40000	40000	40000	50000	30000
Revenue	6000000	7000000	5000000	9000000	4800000	6000000	6000000	6000000	6000000
Total costs	3040000	3040000	3040000	4540000	2440000	4040000	2540000	3050000	3030000
Profit / (Loss)	2960000	3960000	1960000	4460000	2360000	1960000	3460000	2950000	2970000

Advantages of sensitivity analysis:

• Helps in identifying the critical factors / critical inputs for increasing the profitability
• Simple and easy analysis

        Disadvantages of sensitivity analysis:

• We assume that all variables are independent. (A variable will not change with change in other variable). However, in practical scenarios, this is not possible.
• We do not consider the probability of changes in variables.
• This analysis is a basic analysis without considering direct impact on the costs, etc. Hence, it cannot be relied