Question

3. Sensitivity Analysis [LO1] For the company in the previous problem, suppose management is most concerned about the impact of its price estimate on the project’s profitability. How could you address this concern? Describe how you would calculate your answer. What values would you use for the other forecast variables?

Answer 1

Answer and Explanation:

in order to address the concern of management for the impact of price forecast, we should perform the sensitivity analysis.

this is done by adjusting one of the variables with the best and worst while maintaining the other variables constant. the variable being adjusted for our analysis is the price estimate.

price per unit in worst-case is computed by:

price per unit in worst-case

= (price per unit in base-case)*(100% + 15%)

then:

price per unit in best-case

= (price per unit in base-case)*(100% - 15%)

below is the values for the following variables in three types of cases:

base case worst case best case

price $1400 $1190 $1610

units 85000 85000 85000

variable costs $220 $220 $220

fixed costs $3900000 $3900000 $3900000