Question

Discuss ways that breakeven and sensitivity analysis might be used together in evaluating a project. Which one would you use first and why? (There is no right or wrong answer here; I'm interested in your thoughts on how to apply these analytical methods.)

Answer 1

Breakeven is that point/ level at which there is no profit and no loss. Break-even point determines the amount of sales needed for net income to be zero.At breakeven point a company's revenue is equal to the total fixed costs plus variable costs, and the fixed costs equal the contribution margin.

It is calculated by dividing fixed costs by the revenue per unit minus the variable cost per unit. Fixed costs are those cost that do not change regardless of units are sold. The revenue is the price of the product and the variable costs include labour and materials.

Sensitivity analysis refers to the method of predicting the outcome of a decision if a situation turns out to be different than what was predicted. It Helps in identifying how dependent the output is on a particular input value and helps in assessing the riskiness of a strategy.

Sensitivity analysis is a generalization of break-even analysis. In sensitivity analysis, we examine the effect of each parameter on the output of the model, so we can tell which unresolved uncertainties can significantly alter our results.

We would use Breakeven point analysis first, because our first priority should be to recover our cost which we have incurred on the project and in breakeven analysis we aims at recovering our cost.