Question

3. One board member wants to make sure that a complete risk analysis, including sensitivity and scenario analyses, is performed before the proposal is sent to the board. a. Perform a sensitivity analysis. b. What management information is provided by the sensitivity analysis?

Answer 1

Sensitivity Analysis - This is when you would want to present to the board, the impact on certain finance parameters (Gross Margin, Net Margins, Sales etc) , by changing just one variable.

Scenario Analysis - This is when you fix up a scenario (fixing mutliple variables at a level, say High Risk , Medium Risk, Low Risk or as Conservative estimates, and Aggressive estimates) and presenting the impact on certain finance parameters, at those scenarios.

For instance if we do a pricing sensitivity analysis , we can present to the board, the scenario of sales due to increase in pricing by 5% , 10% ...and so on.

Item	MRP	Qty Sold	Actual Sales	Revised MRP	New Sales
Item 1	100	100	10,000	105	10,500
Item 2	140	90	12,600	147	13,230
Item 3	180	80	14,400	189	15,120
Item 4	220	70	15,400	231	16,170
Item 5	260	60	15,600	273	16,380
Item 6	300	50	15,000	315	15,750
Item 7	340	40	13,600	357	14,280
Item 8	380	30	11,400	399	11,970
Item 9	420	20	8,400	441	8,820
Item 10	460	10	4,600	483	4,830

And corresponding scenario on profitability

At a Price Increase of

5%

10%

15%

20%

25%

GM%	56%	57%	58%	59%	60%
CM%	17%	20%	22%	24%	26%