Q20RQ - Horngren'S Financial And Managerial Accounting

Question

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

Step-by-Step Solution

Answer

Answer

 

A sensitivity analysis is a “what if” technique.

 

Step 1: 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. 

Step 2: 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.