Question

Which of the following is a technique most suited to dealing with uncertainty regarding the inputs to a CVP (short-term profit-planning) model?

O Sensitivity analysis
O Regression analysis
O Constrained optimization analysis
O Net present value (NPV) analysis.
O Linear programming

Answer 1

Tje correct answer is option 1. Sensitivity analysis is the most suitable technique for addressing uncertainties in a CVP model, as it examines the effect of variable changes on the outcome.

Step-by-step explanation:

Among the given options, the technique most suited to dealing with uncertainty regarding the inputs to a Cost-Volume-Profit (CVP) model, which is used for short-term profit-planning, is sensitivity analysis. Sensitivity analysis evaluates how different values of an independent variable affect a particular dependent variable under a given set of assumptions. This technique is typically used to predict outcomes when there are uncertainties in the inputs to a mathematical model, such as the CVP model in question.

Sensitivity analysis allows decision makers to assess the impact of changes in key variables such as cost, price, and volume on the model's outcomes. In contrast to regression analysis, which is a statistical method to reveal relationships between variables, or linear programming, which is used for optimization problems, sensitivity analysis directly addresses the question of how sensitive the results are to changes in the assumptions.

To use an analogy from the design process, mathematical models generated during the idea generation phase can estimate costs and are used to predict costs for various alternative solutions. Costs then need to be normalized for comparison, akin to sensitivity analysis which helps analyze the potential fluctuations in CVP outcomes due to changes in input values.

Answer 2

Sensitivity analysis is the technique most suited to addressing input uncertainties in a CVP model, as it evaluates how changes in inputs affect the outcome.

Step-by-step explanation:

The most suitable technique for dealing with uncertainty regarding the inputs to a Cost-Volume-Profit (CVP) analysis, which is a short-term profit-planning model, is sensitivity analysis. Sensitivity analysis is used to predict the impact of changes in one or more variables on the outcome of a given model. It helps in understanding how sensitive the results are to changes in the inputs, allowing decision-makers to assess the range of possible outcomes and the risks associated with variations in key parameters.

Unlike other techniques such as regression analysis, which measures the relationship between variables, or linear programming and constrained optimization analysis, which are focused on finding the optimal solution under certain constraints, sensitivity analysis directly addresses the uncertainty aspect of modeling. Net present value (NPV) analysis is primarily used for long-term investment decisions rather than for assessing input uncertainty in CVP models.