From the course: Accounting Foundations: Managerial Accounting

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Sensitivity analysis

Sensitivity analysis

From the course: Accounting Foundations: Managerial Accounting

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Sensitivity analysis

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- Up until now we've been doing CVP analysis as if the world did not change, but we know that's not true. Changes out of our control happen all the time. What if the county decides to increase property taxes? Or, what if there's a typhoon in Asia and the cost of rice goes up? Well, we can evaluate the effects of many common changes on the breakeven point and the potential profitability for our business. Many factors like an increase in property taxes or an increase in management salaries will cause an increase in fixed costs. If all other factors remain constant, an increase in fixed costs will always increase the number of units needed to break even. Obviously, the number of units needed to reach a target income will increase as well. Assume that we need to analyze the effect on profits if fixed costs for Rawhide Corporation increased from $63,000 to $81,000. How many more baseball gloves must be sold to maintain…

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