Question

In a company with different business units, individual managers make decisions by changing various assumptions of its budget in order to determine how the modifications would affect the operational and financial results. This is an example of ________.

A) financial statement analysis
B) responsibility accounting
C) sensitivity analysis
D) zero-based budgeting

Answer 1

The process where managers change assumptions in a budget to see operational and financial impacts is known as sensitivity analysis, a practice that allows for marginal decision-making.

Step-by-step explanation:

In the scenario where individual managers in a company with different business units change various assumptions of its budget to see how it affects the operational and financial results, they are conducting a sensitivity analysis. This analytical method is utilized to predict the outcome of a decision given a certain range of variables. By manipulating one or several inputs or assumptions, managers can determine the potential impact on the desired outcome, helping to make more informed and optimizing decisions.

Sensitivity analysis is a valuable tool because it allows for marginal decision-making, where managers can assess the benefits and costs associated with incremental changes. This type of analysis is crucial in understanding how different factors contribute to the overall performance and can help in anticipating possible challenges and outcomes of various scenarios.