# Sensitivity analysis.

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This topic contains 3 replies, has 2 voices, and was last updated by  John Moffat 1 year ago.

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• zaca
Participant

Dear, Sir

In the useful approach to sensitivity analysis.
They said

C) to estimate by how much cost and/or revenues would need to differ from the estimated values before the decision maker would be indifferent between 2 options.

I can’t understand the meaning of this sentence. Would you please explain it for me! ( may be some examples if you think it’s necessary)

John Moffat
Keymaster

Just suppose you had a choice between making two products.
One has a selling price of \$10 per unit and costs of \$5 per unit (so profit of \$5 per unit)
The other has a selling price of \$12 per unit and costs of \$6 per unit (so profit of \$6 per unit)

If we ignore any other factors, obviously the second product is more profitable.
However, all the costs/revenues are likely to be estimates and if things turn out to be different than choose the second product may turn out to be wrong.

If you were asked for the sensitivity of the cost per unit of the second product, it would mean by what % would the cost have to change by before both products gave the same profit.
In my little examples, for the second product to give \$5 per unit, the the cost per unit would have to increase from \$6 to \$7. In percentage terms this is an increase of 17% (1/6 x 100).
The relevance is that if the cost per unit of the second one were to change, then if it increases by less than 17% then the second one is still best, but if it increased by more than 17% then the first one would have been the best.

zaca
Participant

wow, now I understand the substance of the problem. I think decision maker is a person, not making a decision. Thank you alot. Have a nice day!

John Moffat
Keymaster

You are welcome

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