Question

Product	Cuban Cigars	Aruban Cigars
Price	21	16
Fixed Cost	50,000	50,000
Unit Cost	6	3
Quantity	20,000	17,000
Variable Cost	120,000	51,000
Total Cost	170,000	101,000
Revenue	420000	272000
Profit	250000	171000

a) Create a Tornado chart showing the effect on profit of each changing each individual input parameter value from its low value to its high value, when all other input parameter values are held at their base case. For this quick initial analysis assume the Low value for each parameter is 50% of its Base Case value and the High value is 150% of its Base Case value.  

B)Explain the implications of this chart.

C)From the tornado chart, identify which input variable has the strongest influence on profit.

Answer 1

We will first do sensitivity analysis to see how profits changes for each variable change from High (150%) to Low (50%). We will do this separate for Cuban Cigars and Aruban cigars to then interpret results separately for these two products.

a) Now we will create Tornado chart using the calculation done so far for each product. Below is the approach.

We need to shift the Y - axis at the base value of Profit (250,000) so that we have values on both sides of the axis

b) Looking at Tornado charts for both products, clearly there is a difference in the impact of each input variable on the output (profit). Between products, "unit cost" seem to have higher impact on profit for Cuban Cigars and lower impact on Aruban Cigars. Fixed cost seem to have lowest impact on profit across both products.

The other critical aspect is to get the estimates right on "Quantity" which is a significant input variable for profit for both products.

c) Clearly looking at Tornado charts for both products, "price" is the strongest input variable on profit output. So, with 50%/ 150% change in price there is a significant change in profit value for the company. Hence, getting the estimates on right price will be critical on the profit of the company.