what are the drawbacks of sensitivity analysis, scenario analysis and break-even analysis? are they reliable in...

what are the drawbacks of sensitivity analysis, scenario analysis and break-even analysis?

are they reliable in open market conditons?

Expert Solution

Sensitivity analysis is an analysis of the effects of changes in variables like sales, costs etc. on a project. The primary drawback of sensitivity analysis is that the underlying variables are assumed to be independent. This, however, is not so the case in the real world and so the changes of the underlying variable can be initiated only up to a certain extent and not beyond that. Secondly sensitivity analysis may, in some cases, give ambiguous results as it is not always possible to properly define optimistic and pessimistic scenarios.

Scenario analysis is a project analysis under a particular combination of assumptions. Various possible outcomes are speculated in scenario analysis. The primary drawback of scenario analysis is that user bias can be created due to incorrect assumptions. This can lead to incorrect sensitivity to the factors at play.

Break-even analysis involves an analysis of the level of sales at which the company breaks even. The primary drawback of break-even analysis is that its assumption that production and sales are the same at all the time is a faulty assumption. Secondly it applies only to a single product or a single mix of products.

Sensitivity analysis, scenario analysis and break-even analysis are not always reliable in open market conditions because in open market conditions many of the assumptions on which the analysis is based do not hold. Moreover in open market conditions several underlying variables no longer remain independent, rather they become dependent and this limits the use of sensitivity analysis, scenario analysis and break-even analysis.

jeff jeffy answered 1 year ago

What are sensitivity analysis, scenario analysis, break-even analysis, and simulation? Why are these analyses important, and...

What are sensitivity analysis, scenario analysis, break-even analysis, and simulation? Why are these analyses important, and how should they be used? please provide APA references !

What is break-even? How is break-even calculated? How is a break-even analysis used? What are the...

What is break-even? How is break-even calculated? How is a break-even analysis used? What are the risks if break-even is not analyzed carefully?

What is the primary difference between a sensitivity and a scenario analysis? A) in a sensitivity...

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What is scenario analysis? Differentiate between sensitivity analysis and scenario analysis. What advantage does scenario analysis...

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A. Sensitivity Analysis and Break-Even Point We are evaluating a project that costs $780,000, has an...

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What is the purpose of break even Analysis?

describe applications of break-even analysis in practice. provide limitations of break-even analysis.

Sensitivity Analysis and break-even point We are evaluating a project that costs $780,000, has an eight-year...

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Break-even Analysis : Break-even analysis attempts to determine the volume of sales necessary for a manufacturer...

Break-even Analysis : Break-even analysis attempts to determine the volume of sales necessary for a manufacturer to cover costs, or to make revenue equal costs. It is helpful in setting prices, estimating profit or loss potentials, and determining the discretionary costs that should be incurred. The general formula for calculating break-even units is: Break-even Units = ( Total fixed costs ) / ( Unit selling price - Unit variable cost ) In StratSim, total fixed costs can be broken into...

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