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Chapter 20: Q20RQ (page 1119)

What is sensitivity analysis? How do managers use this tool?

Short Answer

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Answer

A sensitivity analysis is a “what if” technique.

Step by step solution

01

Sensitivity analysis

A sensitivity analysis is a “what if” technique. It helps in assessing profit or loss results if sales price, costs, volume, or underlying assumptions change.

02

How do managers use sensitivity analysis

Managers keep low breakeven points so that the targets can be easily achievable. But they do not overemphasize this aspect of CVP analysis.

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Most popular questions from this chapter

What are the three ways contribution margin can be ex

On the CVP graph, where is the breakeven point shown? Why?

Why is the calculation to determine the target profit considered a variation of the breakeven calculation?

Determining cost behavior

Identify each cost below as variable (V), fixed (F), or mixed (M), relative to units sold. Explain your reason.

Units Sold 25 50 75 100

a. Total phone cost \( 150 \) 200 \( 250 \) 300

b. Materials cost per unit 35 35 35 35

c. Manager’s salary 3,000 3,000 3,000 3,000

d. Depreciation cost per unit 60 30 20 15

e. Total utility cost 400 650 900 1,150

f. Total cost of goods sold 3,125 6,250 9,375 12,500

What are the three approaches to calculating the sales required to achieve the breakeven point? Give the formula for each one.
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