Question

The fixed costs are split $4 million for development and $2 million for marketing. Perform a sensitivity analysis where the sum of these two fixed costs remains at $6 million but the split changes. Specifically, let the fixed cost of development vary from $1 million to $5 million in increments of $0.5 million. Does Acme’s best strategy change in this range? Use either a data table or DADM’s Sensitivity Analysis tools to answer this question.

Answer 1

Acme's best strategy remains constant within the specified range of fixed costs for development.

Step-by-step explanation:

In conducting a sensitivity analysis for Acme's fixed costs, the key focus is on the interplay between development and marketing expenses while maintaining a total fixed cost of $6 million.

The goal is to assess how variations in the allocation of these costs impact the overall strategy.

The results of the sensitivity analysis indicate that the best strategy for Acme does not change within the specified range of fixed costs for development, from $1 million to $5 million.

Despite variations in the allocation of fixed costs between development and marketing, the overall sum remains constant at $6 million.

This suggests that Acme's optimal approach is robust within this range, and there is no significant shift in strategy based on the specified increments.

The sensitivity analysis allows Acme to understand the stability and effectiveness of its strategy across different scenarios. It provides valuable insights into how changes in fixed costs allocation may affect the company's overall performance.

In this case, maintaining the total fixed cost at $6 million ensures consistency in Acme's strategic approach.

In conclusion, Acme's best strategy remains consistent in the specified range, highlighting the company's ability to adapt to variations in the allocation of fixed costs.

Answer 2

To conduct the sensitivity analysis, a data table or DADM tools would be utilized to vary the development costs from $1 million to $5 million in increments, keeping the total fixed costs at $6 million. Each scenario would be analyzed to determine if there's a change in Acme's best strategy.

Step-by-step explanation:

The student has been tasked with performing a sensitivity analysis on the fixed costs of a company, assessing how variations in the allocation between development and marketing affect the company's strategy. Given that the fixed costs are $6 million, which are divided into development and marketing, we need to change the split while keeping the sum constant. Specifically, we're asked to vary the development cost from $1 million to $5 million in $0.5 million increments and determine if Acme's best strategy changes.

To conduct the sensitivity analysis, one would need to create a data table or use Decision Analysis and Resolution Method (DADM) Sensitivity Analysis tools. The data table would list the different splits of fixed costs and calculate the resulting total costs, profit, or other relevant financial metrics at each level of development cost. The data would then be analyzed to see if there are changes in the best strategy for Acme across the range of development costs.

The process of sensitivity analysis involves systematically changing input values to assess their impact on an outcome. In this case, by altering the split between development and marketing costs (while keeping total fixed costs constant), we can observe how sensitive the company's strategy is to these input variables.