Question

________ is a "what if" technique that estimates profit or loss results if sales price, costs, volume, or underlying assumptions change.

A) High-low method of analysis
B) Sensitivity analysis
C) Contribution margin
D) Operating leverage

Answer 1

The correct answer is option B) Sensitivity analysis.

Step-by-step explanation:

Sensitivity analysis is a 'what if' technique that estimates profit or loss results if sales price, costs, volume, or underlying assumptions change. This type of analysis is critical for businesses to understand the impact of different variables on their profitability. In the context of a firm considering whether to continue operations when operating at a loss, sensitivity analysis can help determine whether the loss would be less by continuing to produce or by shutting down. The preferable option is the one that loses the least amount of money.

Firms take into account both fixed and variable costs to calculate average total cost, average variable cost, and marginal cost. This information is then used along with analysis of sales and revenue, and considering the market structure, to make decisions about the profit-maximizing quantity to produce and the price to charge for their products.